By José Viñals
Monetary stability seems almost a given today, even taken for granted. It wasn’t always like that. Not so long ago, high and volatile inflation routinely raised its ugly head and threatened living standards. Some of us even remember those days! It wasn’t pleasant. But since then, an effective antidote has pretty much wiped out rampant price instability. Over the past three decades, better monetary frameworks have caused the level and volatility of inflation to fall sharply. These frameworks enshrined price stability as the main monetary policy objective, and provided independence and constrained discretion in the pursuit of this objective, often set out through formal inflation targets.
As I said, it worked out well. Or did it? In reality, there was a gaping hole in the system. While monetary policy frameworks fortified the castle against inflation at the front, they didn’t pay much attention to back door vulnerabilities. I’m talking about financial stability.
Filed under: Advanced Economies, Economic Crisis, Emerging Markets, Financial Crisis, Financial regulation, Fiscal Stimulus, IMF, International Monetary Fund | Tagged: asset price bubbles, central banking, financial reform, Financial regulation, financial stability, global financial crisis, global financial linkages, inflation, inflation targets, international trade, monetary policy, price stability | 3 Comments »