The global financial crisis has shattered the confidence of many established principles of monetary policy and financial supervision. This column argues that the two should not remain separate, and maps out the major challenges faced by their complementary implementation.
Three broad guidelines emerge from the authors' analysis:
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First, as far as integrating asset prices into monetary policy reaction functions, credit-fuelled bubbles should be differentiated from equity-type bubbles.
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Second, retain some division of labour when combining macro-prudential regulation and monetary policy.
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Third, when dealing with cross-border spillovers, the macro-prudential toolkit often will be more efficient and should be used before capital controls.
The global financial crisis has shattered the confidence of many established principles of monetary policy and financial supervision, including the idea the two must be separate forces. However, one should keep in mind that policymakers need to understand better the interactions among all those instruments, as well as the efficient way to benefit from transparent and credible communication to the politicians and the general public.
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