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17 November 2021
Financial Stability Review Issue 2, 2021
The box reviews the role of financial stability in the ECB’s new monetary policy strategy and summarises the underlying analytical considerations. Financial stability is a precondition for price stability and vice versa. Accordingly, the pursuit of price stability by means of monetary policy, and of financial stability by means of macro-prudential, supervisory and regulatory policies, are complementary. For example, a build-up of financial imbalances increases the likelihood of future financial crises, with a negative impact on price stability. Addressing these vulnerabilities with adequate marcro-prudential measures is also beneficial for price stability. Similarly, monetary policy may also affect financial stability risks: it can reduce credit risk by boosting activity levels and inflation dynamics but at times may also encourage the build-up of leverage or raise the sensitivity of asset prices. In view of the price stability risks arising in financial crises, there is a clear conceptual case for the ECB to take financial stability considerations into account in its monetary policy deliberations. This does not imply that monetary policy is responsible for guaranteeing financial stability or lessen the role of macro-prudential policies as a first line of defence against financial vulnerabilities. Accordingly, the ECB’s new monetary policy strategy envisages a flexible approach in considering financial stability whenever this is relevant to the pursuit of price stability.
JEL Code
E3, E44, G01, G21 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
29 October 2019
JEL Code
Add JEL codes separated by semi-colon. : General Economics and Teaching