Charles Bean: Central banking then and now
Speech by Mr Charles Bean, Deputy Governor for Monetary Policy of the Bank of England,
at the Sir Leslie Melville Lecture, Australian National University, Canberra, 12 July 2011.
* * *
Good evening! It is a great honour to be invited here to give the tenth annual lecture
dedicated to the memory of Sir Leslie Melville. As you will all know, Sir Leslie had a most
distinguished career, both in academia and as a public servant. Much of his working life was
spent as Chief Economic Adviser to the Commonwealth Bank, the ancestor of the Reserve
Bank of Australia, where he provided advice to the Board on monetary and exchange rate
policy, and also to Prime Ministers and Treasurers on economic matters more generally. In
passing, I should record that Sir Leslie's appointment was in part the result of one of the
Directors of the Bank of England, Otto Niemeyer, pressurising the Commonwealth Bank to
break with tradition by recruiting a professional economist! Sir Leslie also played a key role in
the founding of the post-war economic order, leading the Australian delegation to the Bretton
Woods conference, where he earned the fulsome praise of Maynard Keynes, followed by a
stint as Australia's Executive Director at the new international institutions. And, of course, he
spent almost a decade as the second Vice-Chancellor of this University. I think you can say
that was a professional life lived to the full.
Sir Leslie's early years at the Commonwealth Bank were spent dealing with the Great
Depression, one of the great pathologies of economic history. I joined the Bank of England
from academia a little over a decade ago. While my first seven years turned out to be an
unusually tranquil period for the economy, the past four years have been anything but. So
tonight, I thought I would discuss some of the lessons that I think central banks should draw
from the Global Financial Crisis of 2007-8 and the subsequent Great Recession.
The distinctive feature of a central bank derives from its role as the monopoly supplier of
outside money, comprising notes and coin and commercial banks' reserve deposits. These
constitute the ultimate settlement asset for an economy and mean that a central bank has a
unique ability to create or destroy liquidity through the use of its balance sheet. The primary
objective is to ensure that the supply of that liquidity is consistent with the smooth functioning
of the real economy. From this follows the two core tasks of a central bank: the maintenance
of broad stability in the price level, nowadays often enshrined in a formal numerical target for
inflation; and supporting the process of financial intermediation during times of stress,
including acting as Lender of Last Resort to solvent, though temporarily illiquid, financial
institutions.
Of course, central banks sometimes carry out other tasks too. The Bank of England, for
instance, manages the government's foreign exchange reserves and used to manage our
national debt. And in some countries, central banks are responsible for banking supervision.
But such tasks do not by their nature have to be carried out by the central bank.
Charts 1 and 2 show the balance sheets of the Bank of England and the US Federal
Reserve1 during the crisis. The near-tripling in size is striking, reflecting operations in pursuit
of both the financial and monetary (price) stability objectives. Before the crisis, central banks
provided predominantly short-term loans to banks against generally only the safest collateral,
mainly highly-rated government debt. But when financial intermediaries found their sources
of finance drying up, particularly after the collapse of Lehman Brothers, we began providing
larger loans, of longer tenors, against a wider range of collateral; the Federal Reserve also
dealt with a broader range of counterparties. The same is true of the central banks of other
countries caught up in the maelstrom, including here in Australia.
This leads me to my first general lesson: in a crisis, central banks need to show flexibility.
The demand for many of these support programmes wanes naturally as conditions
normalise, but the crisis has also prompted permanent changes in monetary frameworks. For
instance, the Bank of England has introduced regular auctions of liquidity in which loans can
be secured against either the safest collateral or, at a cost, a wider collateral set, including
high-quality private securities. An increase in bids offering the wider collateral as security
then provides an early warning of financial stress. And here, the Reserve Bank of Australia
has also permanently widened the range of collateral it accepts.
More recently, the movements in the size and composition of our respective balance sheets
reflect transactions carried out for monetary policy purposes, especially our large-scale
purchases of government debt (and, in the US case, also government-backed GSE debt and
mortgage-backed securities) financed by the issuance of reserves. Commonly called
"quantitative easing", I shall say more about the efficacy of these operations later.
Before the crisis, central banks saw these two objectives of monetary and financial stability
as largely complementary in nature. According to the conventional wisdom, the maintenance
of price stability would help foster stable macroeconomic conditions more generally by
anchoring expectations. And the consequent reduction in macroeconomic volatility should
help reduce the likelihood of episodes of financial instability. All that was necessary, then,
was to ensure that banking regulators and supervisors ensured individual financial
institutions followed appropriately responsible policies with regard to their lending decisions
and were sufficiently well capitalised and all would be well.
We know now that this confidence was misplaced. For many advanced economies, the
decade and a half leading up to the financial crisis was indeed a period of unusual
macroeconomic stability, with low and stable inflation accompanied by steady growth - the
Great Moderation. Inflation targeting and similar price-stability oriented monetary policies
appeared to have delivered the goods. But in a number of countries - most obviously the
United States, but also including Australia, Ireland, Spain and the United Kingdom - this
period was also characterised by rapid credit growth and property price inflation, sowing the
seeds of future problems (Chart 3).
Now many factors contributed to the severity of the subsequent financial crisis. A
non-exhaustive list includes: the development of complex securities which were impossible to
value in stressed conditions and which connected financial institutions in unexpected ways;
disguised leverage through the use of securitisation vehicles, whose real aim was regulatory
arbitrage; remuneration packages encouraging positions that generated decent returns most
of the time but high losses in some states of the world; excessive reliance on credit-rating
agencies; defective risk management; and insufficient high-quality capital to absorb losses
when they materialised.
But macroeconomic conditions possibly also played a part2. Far from fostering financial
stability, the Great Moderation may itself have contributed to the build-up of credit and the
adoption of risky positions by leading investors to underestimate potential macroeconomic
risks. And commentators, such as John Taylor (2009) and Bill White (2009) have blamed
excessively loose monetary policy during the years leading up to the crisis. Low policy rates
boost credit growth and asset prices in conventional accounts of the monetary transmission
mechanism, but other work has also highlighted the potential for low safe interest rates to
encourage a shift into riskier assets (for example Claudio Borio and Haibin Zhu, 2008)3.
While the contribution of monetary policy to the crisis is controversial - I shall say a bit more
on this later - I find plausible the idea that the long period of relative macroeconomic stability
lulled investors into a false state of security.
This leads to my second lesson from the crisis: the achievement of price stability does not
guarantee the maintenance of financial stability and, without further measures, may possibly
even compromise it.
My next lesson follows on from this and relates to deficiencies in our analytical framework.
The canonical macroeconomic model for thinking about the design of monetary policy is that
of the New Keynesian synthesis (see Richard Clarida, Jordi Gali, and Mark Gertler, 1999;
Michael Woodford, 2003). This focuses on the consequences of real and nominal rigidities in
goods and labour markets, which give rise to a short-run trade-off between inflation and
activity. The dynamic stochastic general equilibrium models in use in many central banks
typically embody this synthesis, though usually with quite a few knobs and whistles added
on. Moreover, the optimal monetary policy in these models looks rather like flexible inflation
targeting: the central bank aims to offset completely shocks to aggregate demand, but
accepts temporary movements in inflation in the face of shocks to supply so as to limit the
volatility in output.
Financial intermediaries are conspicuous by their absence in these models. That is not to say
that mainstream macroeconomists and monetary policy makers ignored financial
considerations altogether. It had been long understood that financial frictions could affect
both the evolution of the economy and the monetary transmission mechanism. But these
frictions typically served merely as modest amplification and propagation mechanisms, rather
than a potential source of fundamental disturbance to the economy. One example is the
"financial accelerator" arising from monitoring costs which give rise to a relationship between
the external finance premium paid by a borrower and their financial health (see Ben
Bernanke, 1983). The behaviour of intermediaries was thus seen as being of marginal
relevance to the understanding of macroeconomic fluctuations. And many analyses ignored
financial imperfections altogether, assuming that that the transfer of funds from savers to
borrowers was both frictionless and efficient.
To see why the behaviour of financial intermediaries is potentially so important, note that
most financial crises have been characterised by two features. The first is an excessive
expansion of credit during the prelude to a crisis, perhaps prompted in the first instance by
some innovation4 or other beneficial economic development. The second is a mismatch
between the maturities and/or currencies of the assets and liabilities on either side of the
balance sheet.
Consider a simplified bank balance sheet, shown in Chart 4, with the bank's holdings of
loans, securities and reserves financed by a mixture of: (insured) deposits; other debt of
various forms, including borrowing from other financial institutions collateralised against the
bank's assets, repurchase agreements, unsecured bank debt; and finally equity capital. This
last category is the initial absorber of unexpected losses and is a key determinant of
sustainable balance sheet size and thus of the supply of credit to the economy. That is, by
the way, rather different from the standard textbook model, in which banks' holdings of
reserves and loans are financed solely by deposits and the size of the bank's balance sheet
is determined by the product of its holdings of reserves and the money multiplier. Since
short-term finance is typically cheaper than long-term finance, profit-maximising
intermediaries have an incentive to finance their illiquid long-term loans by potentially
footloose short-term debt, relying on their ability to roll that debt over when it matures, or to
find similar alternative funding sources. Moreover, the recent episode was also marked by
increased reliance on short-term wholesale funding, which proved more prone to flight than
traditional retail deposits.
Now suppose that the returns on the bank's loans turn out less than expected or the value of
its securities falls. That could be the result of a macroeconomic shock or just reflect a
correction to initially over-optimistic expectations. Then the bank's net worth also falls,
reducing the buffer available to cover any further unexpected losses, potentially raising the
costs of unsecured debt. Moreover, the collateral available to back secured debt also
shrinks.
Suppose the bank initially held assets worth fifteen times the value of its equity and assume
that it wishes to restore that degree of leverage (in practice, a deterioration in
macroeconomic conditions might also lead to lower desired leverage). Then the bank is
faced with either reducing its assets or increasing its equity. If it pursues the former strategy,
then it would need to reduce its assets by fifteen times the amount by which its capital has
fallen. Moreover, by depressing the prices of those assets, such a fire sale also impairs the
balance sheets of other banks, amplifying the effect of the shock. The same is true if banks
seek to repair their balance sheets by cutting back on the extension of credit: less credit
implies lower activity and greater loan losses. Fire sales and credit crunches can thus greatly
amplify a financially-driven downturn. Both played a role in the latest crisis.
Assuming that policymakers are not actively seeking a reduction in the supply of credit,
shrinking the balance sheet leads to an unsatisfactory outcome from a macroeconomic
perspective. Injecting additional equity capital would be preferable. But while banks may be
prepared to do this over time, by cutting dividends to shareholders or reducing staff
compensation, they are typically reluctant to raise new capital directly in such circumstances.
In part, that is because the benefits of extra capital accrue initially to existing debt holders
who will consequently be less likely to suffer losses. Moreover, investors may see additional
injections of capital as a signal that the bank is in difficulties. In sum, there is a collective
action problem, to which mandatory stress tests coupled with forced re-capitalisation is one
possible solution.
So my third lesson is: financial intermediation needs to be brought into mainstream
macroeconomic analysis.
That such a lesson should even be necessary may be somewhat surprising giving the
frequency of financial crises around the globe in recent years; see Chart 5 taken from the
work of Rong Qian, Carmen Reinhart and Ken Rogoff (2010). Introducing - or rather
re-introducing - financial considerations to the analysis of macroeconomic fluctuations would
also be returning the study of the business cycle to its historical roots.
This task is already well under way in academia and I suspect the field of macroeconomics
will look very different in a decade or so. We are, though, still in the foothills. But to give a
broad-brush flavour of how financial intermediaries might affect things, we can look to the
graphical extension of the New Keynesian model offered by Woodford (2010).
The left-hand panel of Chart 6 shows the demand for funds from ultimate borrowers, LB,
together with the total supply of loanable funds from savers, LS. The former is a decreasing
function of the cost of borrowing, RB, while the latter is an increasing function of the return on
savings, R. For simplicity, I shall take this to be the return on deposits and the same as the
central bank's policy rate. The marginal source of funds to intermediaries, however, is likely
to be in the wholesale markets and, if unsecured, these will need to offer a higher return to
compensate for the associated default risk.
In the standard model with costless financial intermediation, the loanable funds market clears
at A and the borrowing and saving rates are equal. If intermediation is costly, however, a
spread, S, opens up between the two and the volume of loans will be lower, at L. Relating L
to this spread then generates a demand for intermediated funds as a decreasing function of
the spread: the XD schedule in the right-hand panel of Chart 6.
To determine the value of this spread, we then need a model of the supply of intermediation
services, XS. Given our earlier discussion, this is just the net worth of the intermediaries
multiplied by their desired leverage. Desired leverage is, in turn, likely to be higher the
greater is the spread between the return on investments and the cost of funds. It is also likely
to be lower the greater the degree of uncertainty about the environment. So the schedule will
be upward sloping, and lie further to the right, the higher is bank capital. Moreover, the
schedule should be flat for low levels of leverage, as the prospect of bank creditors losing
money is then negligible and the spread just needs to cover the actual costs of
intermediation, such as running a branch network. But as leverage rises, so there is an
increasing risk of loss to creditors and the interest rate paid to the suppliers of unsecured
bank debt needs to reflect that. If the state is believed to guarantee all bank debts, then
XS will be flat. Finally the schedule will become vertical when the capital ratio, which in this
simple set-up is just the inverse of the leverage ratio, reaches its regulatory minimum. The
equilibrium spread is given by the point of intersection, B.
During the upswing phase of a credit/asset-price boom, perceptions of macroeconomic risk
tend to be low. Moreover, rises in asset prices also boost bank net worth. In sum, the health
of the banking system is not in doubt and the upward sloping part of the XS schedule will
tend to be a long way out to the right. But when the boom turns to bust, the associated
unexpected losses lead to falls in bank equity, reducing the supply of credit. Moreover,
people's subjective perception of the macroeconomic risk blows out, reducing desired
leverage. The XS schedule moves inwards, to XS', while the equilibrium spread rises to S'.
That in turn pushes the rates of return on savings down to R' and the cost of borrowing up to
RB' and the volume of loans down to L'. The fire sale externalities referred to earlier can then
greatly amplify this contraction in credit supply by generating further losses in the net worth
of intermediaries.
The consequences of all this for output are shown in Chart 7. On the usual assumption that
savers save a fraction of any increase in income, the supply of funds from savers will be
increasing in output, generating the usual downward-sloping relationship between output and
the policy rate, IS. Its location, however, also depends on the spread, S, with the boom
phase of the credit cycle leading IS to shift outwards and the bust phase shifting IS inwards.
To complete the story, we just need to add a description of monetary policy. Assuming
inflation starts off at target, an inflation targeting central bank will seek to hold the level of
demand at potential, so monetary policy is described by MP. In the face of a credit boom, the
central bank would then raise the interest rate to negate the expansionary effect on demand,
and cut it in the face of a credit bust. The corresponding aggregate demand schedule,
incorporating the endogenous policy response, is given by AD in the right-hand panel,
together with a conventional upward-sloping aggregate supply schedule, AS; for simplicity, I
ignore the possible impact on the supply of goods of changes in the price and availability of
credit.
A central implication of this analysis is that while it suffices to think in terms of a single
representative interest rate in normal conditions, in times of stress the whole set of market
rates need to be considered. Consequently, movements in the policy rate alone no longer
provide an accurate summary measure of monetary conditions. The importance of this is
illustrated in Chart 8, which shows the recent paths of the policy rate in the United States and
the United Kingdom, together with representative measures of the cost of bank debt and the
corporate loan rate5. Before the crisis, the policy rate and marginal cost of funds were close
together, with the spread of the loan rate above funding cost reflecting the cost of
intermediation and the default risk. The onset of the crisis then pushed both market rates up
relative to the policy rate as concerns about the solvency of financial intermediaries rose.
Focusing on the policy rate alone overstates the degree to which the effective monetary
stance loosened in the wake of the collapse of Lehman's.
A corollary of this, together with the severity and the duration of the downturn, is that policy is
more likely to be constrained by the zero lower bound than previously thought. Ahead of the
crisis, simulations with macroeconomic models suggested that, with an inflation target of
2 per cent, the zero lower bound would bind around 10 per cent of the time. The costs of this
were pretty modest, however, because such episodes were likely to be short in duration (see
e.g. David Reifschneider and John Williams, 2000). That analysis looks less persuasive now.
Indeed a study by Williams (2009) suggests the ideal level of the US Federal Funds rate after
the collapse of Lehman's would have been around minus 4 per cent6 and puts the cost of this
constraint - ignoring the scope for other policies - at around $1.8 trillion over 2009-2012.
Other policies are, of course, available. In the monetary sphere, that takes the form of
purchases from the private sector of longer-term public and private securities, financed by
issuing claims on the central bank. As we saw in Charts 1 and 2, both the Bank of England
and the US Federal Reserve have made substantial large-scale asset purchases, worth
about 15% of GDP in each case. The aim of such purchases is to drive down the yields on
these and similar assets by increasing their scarcity, so boosting demand. Commonly
referred to as "quantitative easing", the moniker is somewhat misleading as it focuses
attention on the associated reserve expansion, rather than the change in the portfolio
composition of the central bank and private sector.
But do they work? Under Ricardian equivalence the answer would be No, as the associated
transfer of risks from private sector balance sheets onto the public sector's is matched by
offsetting movements in future taxes (Gauti Eggertson and Woodford, 2003). Be that as it
may, event studies by Joe Gagnon and others (2010) for the United States, and Mike Joyce
and others (2010) for the United Kingdom suggest that long-term bond rates in each
jurisdiction fell by around 100 basis points as a result of the purchase programmes, though
the ultimate impact on aggregate demand is harder to judge.
central banks do not run out of ammunition when policy
From this I draw my fourth lesson:
rates reach their zero lower bound.
Despite that, as we have seen only too clearly, it is next to impossible to stabilise activity in
the face of a financial crisis, as indebted households, businesses and intermediaries all seek
to de-leverage simultaneously. Moreover, the upswing of the credit cycle is frequently
associated with an increase in lending to purchase assets, especially property; that was
certainly true on this occasion. If the consequence is an investment or
construction boom - as was the case in the United States, Ireland and Spain - the result is a
capital overhang that needs to be worked off. There are welfare gains from avoiding such
capital misallocation.
That leads naturally to my fifth lesson: prevention is better than cure.
But how best to do that? Could a different choice of monetary policies have led to a better
outcome? Ahead of the crisis, there was a robust debate on whether monetary policy should
seek to moderate credit/asset-price booms as well as maintain low inflation. On the one
hand, the Bank for International Settlements and others (e.g. Bill White, 2006; Stephen
Cecchetti et al., 2002) argued that policy should be set tighter than justified by the inflation
outlook so as to "lean against the wind". On the other hand, Chairman Greenspan and others
at the Federal Reserve (Alan Greenspan, 2002; Bernanke et al., 1999) advocated only
responding to such events in so far as they affected the immediate macroeconomic outlook,
but acting aggressively to stabilise markets in the event of a correction, sometimes referred
to as "cleaning". The Fed broadly followed such a policy during the dot-com boom-bust.
Before the crisis, I stood some way between these two positions (Bean, 2003). On the one
hand, a policy of leaning against the wind is perfectly consistent with the practice of flexible
inflation targeting once it is recognised that financial instability usually results in a sharp
contraction in demand and potential disinflationary pressure. Undershooting the inflation
target in the near term could then enhance the chances of success further out. On the other
hand, there are practical obstacles to the implementation of a "leaning" policy. In particular,
such a policy involves accepting lower output in the short term in return for uncertain future
gains and also runs the risk of precipitating the very collapse one is seeking to avoid.
The severity of the recession might appear to tilt the argument in favour of "leaning", but the
question still arises as to how effective such a policy would have been in restraining the
boom in credit and property prices and at what cost to activity. Together with colleagues from
the Bank (Bean et al, 2010), I recently attempted to investigate this question using simple
vector autoregressive models of the US and UK economies. I will refer you to the paper for
the details, but Table 1 shows the results of counterfactual simulations of a pretty aggressive
"leaning against the wind" policy, in which the policy rate is held around 200 basis points
higher over the 2003-2006 period.
The simulations suggest that the peak in real house prices would have been about
71⁄2% lower in the United States and some 20% lower in the United Kingdom. The impact on
the stock of credit is, though, more modest: just 3-4% lower by the end of 2006. Moreover,
the cumulative impact on activity is considerable, with output around 3% lower by the time
the crisis begins. Clearly, then, the terms of trade for controlling the risks to financial stability
alone
through monetary policy do not look very favourable: even substantially higher interest
rates over a sustained period would not have prevented the crisis. A similar conclusion is
reached by Bernanke (2010) and Carmen Reinhart and Vince Reinhart (2011).
Moreover, restricting domestic credit expansion will not serve if the cross-border activities of
banks result in their most vulnerable exposures originating overseas. That, of course, was
the case in the present crisis, where the main losses to UK and European banks arose from
holdings of securities linked to the behaviour of the US housing market. On top of that, a
unilateral increase in interest rates may well end up having a perverse effect on credit
growth, because it sucks in capital flows from abroad to take advantage of the interest
differential, so boosting the real exchange rate and adding to the supply of funding to the
banking sector.
The obvious conclusion is that one needs to look to other instruments - so-called
macroprudential regulation - which act directly against the expansion in credit during the
upswing and limit the contraction in any bust; in other words they stabilise the supply of
intermediation schedule, XS. Given our earlier discussion, an obvious way to do this is by
raising capital requirements on banks, thus improving their resilience, during the upswing of
the credit cycle and reducing them during the subsequent downswing, allowing banks to
maintain the supply of financial services. The new Basel III agreement on capital and liquidity
regulation makes specific provision for such a countercyclical capital buffer of up to 2.5% of
risk-weighted assets on top of the increased base Core Tier 1 capital ratio of 7%, i.e. a
potential increase in capital requirements of more than a third.
Capital requirements and leverage constraints both affect the overall size of banks' balance
sheets. But credit booms and busts are often associated with excessive lending to particular
risky segments of the market. So instruments to affect the composition of balance sheets are
also potentially useful, for instance through selective variation in the risk weights applied to
the calculation of capital ratios. Quantitative controls applying to particular sorts of loans,
such as maximum loan-to-value ratios on mortgages are another option, as are minimum
haircuts on repo and similar financial transactions between intermediaries. Finally, since
excessive maturity mismatch is an aggravating feature of financial crises, banks could be
asked to increase their holdings of reliably liquid assets as the risk of instability builds, in an
analogous fashion to the capital buffer.
Macroprudential policies are sometimes described as the missing instrument, but in reality
many of these tools are familiar to regulators and there is already international experience in
their application, often from emerging economies (though in some cases their application has
been aimed at restraining aggregate demand rather than reducing the risk of financial
instability). Indeed, the Australian experience nearly a decade ago is a prime example. Over
2002 and 2003, house prices here rose nearly 40 per cent, stimulated in part by changes in
the tax treatment of housing, increased competition in credit markets and the attainment of a
low inflation macroeconomic environment; alongside this, there was a similarly rapid rate of
expansion in mortgage lending (see Chart 3). APRA started signalling its concerns to bank
executives during 2002 and in 2004 went on to increase the capital requirements on
uninsured "Low Doc" loans. More generally, APRA seems to have been quite strict in
ensuring that loan origination standards were maintained and banks made prudent
provisions for losses. This robust regulatory response was complemented by a slightly tighter
monetary stance and numerous "open-mouth operations" by the RBA highlighting the
growing risks in the housing and credit markets. The effect of these actions was to take some
of the steam out of the housing market and ensure that banks were in a better position to
withstand the global financial crisis when it finally broke. (For a fuller discussion of the
Australian experience, see Paul Bloxham, Christopher Kent and Michael Robson, 2011.)
Other examples of macroprudential regulation in action include: successive increases in risk
weights on commercial and residential property loans by the Reserve Bank of India during
2005-8; dynamic provisioning after 2000 in Spain; and quantitative constraints on mortgage
lending in Hong Kong in 1994. There are several other instances. Like Molière's M. Jourdain,
some have been speaking prose all along; the rest of us just need to catch up.
The evidence suggests the effectiveness of these tools is, though, variable and we should
therefore not expect too much from them (see Committee on the Global Financial System,
2010). Bankers have every incentive to figure out ways to circumvent regulatory constraints
and, if the restraints on behaviour are deemed onerous, activity is likely to shift outside the
regulatory perimeter. It may be possible to design policies which embed incentives to comply
rather than evade, and smart supervision can help. But there could be occasions when
tighter monetary policy is the only way to reach those parts of the financial system beyond
the reach of regulation. In such cases, if other policies are not available, then "leaning
against the wind" may be the only option left.
As the simple analytical framework used earlier makes clear, tighter monetary policy reduces
both aggregate demand and credit supply, while tighter regulatory policies do the same. But
the empirical evidence suggests the impact of interest rates on credit is generally relatively
weak, while capital and liquidity regulation have a very direct impact on leverage and
maturity transformation and thus on the resilience of the financial system.
So my sixth lesson is: both monetary and regulatory policies are required to maintain price
and financial stability; moreover, monetary policy should remain focused on the control of
inflation, while regulatory policies should be assigned to maintaining financial stability.
Much is sometimes made of the risk of monetary and macroprudential policies pulling in
opposite dir