Monetary Policy

A subtle paradigm shift?

Claudio Borio & Philip Lowe

Published: June 2003

A growing challenge for central banks is to secure monetary and financial stability simultaneously. Indeed, somewhat paradoxically, success in controlling inflation can sometimes contribute to the development of imbalances that ultimately lead to financial stresses, with potentially serious macroeconomic consequences. And a monetary regime that does not take these imbalances into account may unwittingly accommodate their further build-up. Accordingly, despite the difficulties involved, it may be desirable, in some circumstances, for monetary policy to be used to contain financial imbalances before they grow too large, even if the imbalances pose no immediate threat to inflation. Justifying such a response would not require redefining the ultimate objectives of monetary policy. It would, however, arguably call for adopting longer policy horizons than are commonly used and paying greater attention to the balance of risks facing the economy.

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