•  Secondly, the emergence of a globalised market has quite naturally led to new developments in monetary policy instruments. The interest-rate instrument is overwhelmingly used to the detriment of quantitative and regulatory instruments. •  Lastly, these instruments serve converging strategies. The ECB’s monetary policy framework, for instance, is based on an analysis of growth in the monetary aggregate – the EMU reference value for M3 growth is 4.5% – combined with a wide range of economic and financial indicators to monitor inflationary risks. In such a context, monetary policy acts as a stabiliser. Monetary policy alone cannot guarantee the stability of financial systems, which may be jeopardised by shocks from both the financial and the real economies. However, it must be stressed that an adequate monetary policy is a fundamental prerequisite to a smooth functioning of the financial cycles. An appropriate monetary stance –both in terms of interest rate and money supply – is crucial for banks and monetary participants to base their decisions on solid ground. The objective of price stability lowers economic agents’ uncertainty regarding future price developments. In addition, by committing itself to a long-term objective, the central bank reduces market uncertainty, which can be a source of disruption to the financial economy. Interest rates and money supply are less volatile as a result, which is of benefit to the long-term growth of the economy. However, for financial systems to be stable, monetary policy must be consistent with the other aspects of economic policy, that is, fiscal policy and structural programmes.

I would like therefore to consider two issues here: •  Firstly, experience suggests that financial cycles may have recently tended to amplify relative to business cycles; what are the driving factors behind this move;  BIS Review 41/2001  1  •  Secondly, what are the possible policy implications of this development, from both a monetary and financial stability perspective. 1. Experience suggests that financial cycles have recently tended to amplify relative to business cycles. A. What are the major features of these amplified financial cycles? Let us first consider credit cycles. There is no doubt that the amplitude of credit cycles is usually larger than that of business cycles. What is however noticeable here is that, over the last three decades, business cycles have been less frequent and less amplified while credit cycles have tended to remain fairly marked. Thus credit cycles have been amplifying in relative terms compared with business cycles. Asset price cycles have also become more pronounced even if the fixed interest rate markets have a tendency to be somewhat contra-cyclical. •  In the last two decades market forces have indeed tended to cause clear misalignments between equilibrium and actual asset prices. Stock markets in particular have experienced this phenomenon. But in foreign exchange markets as well, prices have also tended to diverge substantially from their “equilibrium level”, although those divergences have been contained through fruitful GVII cooperation during the last 15 years. •  In addition, some markets have seen an increase in volatility and frequent volatility peaks.