Monetary policy and financial stability: an open debate by Isabel Marques Gameiro, Carla Soares, João Sousa – Economic Bulletin – Spring 2011 published by Banco de Portugal (2011).
The recent global fi nancial crisis triggered the need to better understand the link between the fi nancial sector and the macroeconomy and the role of central banks in addressing fi nancial 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 fi nancial stability. Proposals range from strengthening the understanding and monitoring of macro-fi nancial interactions to more drastic ones that propose to add fi nancial stability as an additional objective for monetary policy or use monetary policy for fi nancial stability purposes. We conclude that given the importance of the fi nancial system for the monetary policy transmission mechanism, fi nancial stability concerns need to be taken into account in monetary policy. On the other hand, monetary policy, including unconventional measures, contributes to fi nancial 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 fi nancial stability and potential confl its 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 fi nancial system and, whenever needed, act to reduce the likelihood of systemic events and minimize the negative effects on the economy.
