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The Role of Monetary Policy and macro-prudential Tools for financial Stability in the Euro Area

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The policy paper first reviews the discussion around the role for central banks in financial stability and using the interest rate as a tool to this end in particular. The authors develop a case against using the interest rate to react to asset price inflations. They then shortly outline more effective and efficient instruments. For those instruments they drew up some thoughts of whether the responsibility of their use should be placed with the European Central Bank, another EU-level institution or whether the centre of gravity should remain at the national level.

Policy contribution Financial Stability Conference 2017
16 November 2017
Source: Financial Risk and Stability Network

Authors:
Daniel Detzer, Carl von Ossietzky University Oldenburg
Jan-Martin Frie, European Political Strategy Centre, Brussels

PDF  >  The Role of Monetary Policy and macro-prudential Tools for financial Stability in the Euro Area

This policy paper has been prepared as an accompanying and follow-up contribution of the Financial Stability Conference 2017 which was held October 18 in Berlin. Early-stage and PhD researchers have been invited to write policy-oriented papers on selected topical issues of the conference to be published, circulated and enclosed in the conference report.

Abstract:

Proponents of macroprudential regulation as a tool to maintain financial stability have been vocal for a long time but the concept has been given serious attention only after the great financial crisis (GFC). One stream of this discussion, aims to revisit the role of central banks’ in preserving financial stability. More narrowly, a long-standing discussion of how central banks should react to asset price booms or bubbles had gained new traction shifting the tides for those in favour of using interest rates to “lean against the wind (LATW)”. In the following we will shortly review the discussion around the role for central banks in financial stability and using the interest rate as a tool to this end in particular. We approach this question with a focus on the Euro area. Here we develop a compelling case against using the interest rate to react to asset price inflations. We then shortly outline some more effective and efficient instruments. For those more suitable instruments we will draw up some thoughts of whether the responsibility of their use should be placed with the European Central Bank, another EU-level institution or whether the centre of gravity should remain at the national level.

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