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Monetary policy and financial stability: an open debate
The recent global financial crisis triggered the need to better understand the link between the financial sector and the macroeconomy and the role of central banks in addressing financial stability concerns, in particular regarding the interaction with monetary policy. This paper surveys the main contributions from the economic literature on this issue. There is a wide set of perspectives on how monetary policy should take into account financial stability. Proposals range from strengthening the understanding and monitoring of macro-financial interactions to more drastic ones that propose to add financial stability as an additional objective for monetary policy or use monetary policy for financial stability purposes. We conclude that given the importance of the financial system for the monetary policy transmission mechanism, financial stability concerns need to be taken into account in monetary policy. On the other hand, monetary policy, including unconventional measures, contributes to financial stability (it is even crucial to it under certain circumstances). However, the monetary policy primary objective should remain focused on price stability. It should also be noted that, in general, price stability does not guarantee financial stability and potential conflits between the two are highly unfavourable. Therefore, it is essential for other policies, in particular micro and macro-prudential ones, to maintain a close surveillance of the financial system and, whenever needed, act to reduce the likelihood of systemic events and minimize the negative effects on the economy.