Interaction between Monetary Policy and Bank Regulation

09-02-2016

The financial crisis has shown that price stability is not sufficient to guarantee financial stability. Prior to the recent financial crisis, the framework of monetary policy was broadly converging toward a price stability (inflation) target and a short-term interest rate as a policy tool. Price stability, however, did not ensure financial stability as the financial cycle and the business cycle are not synchronised. As a consequence, new financial regulation tools were set up to increase the resilience of financial institutions. The newly emerging model is one in which monetary policy is primarily aimed at price stability and supervisory (macro-prudential) policy is primarily aimed at financial stability.

The financial crisis has shown that price stability is not sufficient to guarantee financial stability. Prior to the recent financial crisis, the framework of monetary policy was broadly converging toward a price stability (inflation) target and a short-term interest rate as a policy tool. Price stability, however, did not ensure financial stability as the financial cycle and the business cycle are not synchronised. As a consequence, new financial regulation tools were set up to increase the resilience of financial institutions. The newly emerging model is one in which monetary policy is primarily aimed at price stability and supervisory (macro-prudential) policy is primarily aimed at financial stability.