Two, be more tolerant of inflation outcomes close to zero. Masaaki Shirakawa draws on Japan’s experience to suggest that the risks to economic activity associated with very low inflation did not warrant ultra loose monetary policy stances that undermine financial stability. [14] However, a more flexible approach to implementing inflation targeting can potentially be misinterpreted as reducing the commitment to price stability. It therefore needs to be accompanied by clear communication on the consistency between taking financial stability into account while pursuing price stability as the primary objective. FISCAL POLICY Fourth and final proposition: fiscal policy plays an important role in helping to secure both price stability and financial stability. The best contribution that fiscal policy can make to both price stability and financial stability is to ensure the sustainability of public debt. The role of fiscal policy in an integrated policy framework has not received as much attention as it probably deserves. Let me offer two reasons why it should. Sound public finances reduce the risk of fiscal dominance, enabling monetary policy to operate more freely to pursue its price stability mandate. Quantitative easing by major central banks through the purchase of massive amounts of government debt was a necessary response to the strong deflationary pressures unleashed by the Global Financial Crisis. But as government spending continued to grow long after the crisis and central banks continued to purchase government debt, the risk of fiscal dominance grew: the concern that normalising, let alone tightening, monetary policy would create fiscal problems.

[7] Tobias Adrian and colleagues at the IMF find that augmenting conventional monetary policy with foreign exchange interventions and capital flow measures in emerging market economies may improve their monetary policy trade-offs. [8]  The fundamental premise of an integrated policy framework is the recognition that policies that are independent in execution are often interdependent in their effects. If fiscal policy is not sound, fiscal dominance concerns will undermine monetary policy credibility. If the financial system is not sound, financial dominance concerns may compromise monetary policy. Fiscal stability may also be put at risk. In an integrated policy framework, the objectives of monetary, macro-financial, and fiscal policies do not need to change. But the way these objectives are pursued cannot ignore their implications for financial stability and price stability. Specifically, an integrated policy framework must seek to avoid the unsustainable build-up of debt which is the root cause of much financial instability. For monetary policy, it means providing a credible anchor for price stability in a way that does not lead to an unsustainable increase in leverage in the economy. For macroprudential policies, it means leaning against an unsustainable expansion of credit, inflation in asset prices, and the excessive build-up of debt in the economy. For fiscal policy, it means ensuring that public debt is sustainable and does not become a source of financial vulnerability in the economy. MACRO-FINANCIAL POLICIES The second key proposition: financial sector vulnerabilities are best addressed using a variety of macro-financial policies in a coherent manner.