from Part III - Monetary Theory
Introduction
The recent financial crisis has highlighted the vulnerability of today's globally integrated financial system and the dismal consequences of financial instability for the broader economy. The deficiencies of the pre-crisis policy consensus on the way to deal most effectively with financial stability risks have also been laid bare.
An important first lesson of the recent experience is that price stability is not sufficient for preserving financial stability. Indeed, while monetary policy had been increasingly successful in containing inflation and reducing macroeconomic volatility during the ‘Great Moderation’, it was not able to prevent a large-scale build-up of financial imbalances, which, subsequently, induced a severe global recession and potentially long-lasting welfare losses.
A second lesson is that the predominant microprudential approach to financial regulation focusing on the stability of individual financial institutions is not sufficient for system-wide stability.
The recent crisis has thus raised fundamental questions concerning the optimal macroeconomic policy framework – and the role of the central bank – as we move forward. Two issues stand out in particular: how can we improve our ability to contain systemic risks to financial stability knowing that, in case of adverse shocks, these risks can materialize with devastating consequences for the broader economy? And, more specifically, how and to what extent can central banks sustainably contribute to ensuring financial stability while pursuing price stability as their primary mandate?
To save this book to your Kindle, first ensure [email protected] is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.
Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.
Find out more about the Kindle Personal Document Service.
To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.
To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.