Prudential policy and financial dominance: exploring the link

Frederic Boissay, Claudio Borio, Cristina Leonte and Ilhyock Shim

BIS Quarterly Review, 2023

Abstract: Since mid–2021, central banks have rapidly tightened monetary policy against the backdrop of historically high debt levels and a strong increase in inflation. Experience over the past five decades reveals that, under broadly similar circumstances, monetary policy tightening could usher in financial stress. We find that prudential policy tightening, whether before or during monetary tightening, helps to avoid such stress. Tighter prudential policy therefore reduces the risk of financial dominance and provides central banks with more policy headroom to fight inflation.

JEL-codes: E52 G18 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (6)

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