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The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area

Ugo Albertazzi, Alberto Martin, Emmanuelle Assouan, Oreste Tristani, Gabriele Galati (), Thomas Vlassopoulos, Petra Adolf, Christoffer Kok, Carlo Altavilla (), Vivien Lewis (), Desislava Andreeva, Diana Lima, Claus Brand (), Alberto Musso, Matthieu Bussiere (), Kalin Nikolov (), Stephan Fahr, Matic Patriček, Valère Fourel, Esteban Prieto (), Florian Heider, Maria Rodriguez-Moreno (), Julien Idier, Federico Signoretti (), Jorge Aban, Ulrike Busch, Gene Ambrocio, Alan Cassar, Hiona Balfoussia, Dimitrios Chalamandaris, Guido Bonatti, Vincenzo Cuciniello, Diana Bonfim (), Markus Eller (), Miguel Bouchinha, Matteo Falagiarda, Luis Fernandez, Angela Maddaloni (), Garo Garabedian, Falk Mazelis, Felix Geiger, Pavo Miettinen, Alberto Grassi, Anton Nakov (), Nikolay Hristov, Goran Obradovic, Pelin Ibas, Maria Papageorghiou, Michael Ioannidis, Armands Pogulis, Jansen David Jan, Vanessa Redak, Mario Jovanovic, Anatoli Segura Velez, Jan Kakes, Jens Tapking, Alina Kempf, Maria Valderrama, Melanie Klein, Benjamin Weigert () and Marek Licak

No 272, Occasional Paper Series from European Central Bank

Abstract: Since the European Central Bank’s (ECB’s) 2003 strategy review, the importance of macro-financial amplification channels for monetary policy has increasingly gained recognition. This paper takes stock of this evolution and discusses the desirability of further incremental enhancements in the role of financial stability considerations in the ECB’s monetary policy strategy. The paper starts with the premise that macroprudential policy, along with microprudential supervision, is the first line of defence against the build-up of financial imbalances. It also recognises that the pursuit of price stability through monetary policy, and of financial stability through macroprudential policy, are to a large extent complementary. Nevertheless, macroprudential policy may not be able to ensure financial stability independently of monetary policy, because of spillovers originating from the common transmission channels through which the two policies produce their effects. For example, a low interest rate environment can create incentives to engage in more risk-taking, or can adversely impact the profitability of financial intermediaries and hence their capacity to absorb shocks. The paper argues that the existence of such spillovers creates a conceptual case for monetary policy to take financial stability considerations into account. It then goes on to discuss what this conclusion might imply in practice for the ECB. One option would be to exploit the flexible length of the medium-term horizon over which price stability is to be achieved. Longer deviations from price stability could occasionally be tolerated, if they resulted in materially lower risks for financial stability and, ultimately, for future price stability. ... JEL Classification: E3, E44, G01, G21

Keywords: financial frictions; Monetary policy; systemic risk (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-cba, nep-eec, nep-isf, nep-mac and nep-mon
Note: 451871
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