At the risk of oversimplifying, Central Banks associated with – or responsible for – financial stability may find themselves with:   two separate missions: price and financial stability    two different accountability regimes: full independence for monetary policy; coordination or subordination mode for financial stability    two interacting sets of instruments: interest rates and macro prudential tools (a situation made even more complicated when unconventional monetary policies are implemented)  The potential for confusion is real. It is not difficult to imagine situations where actions that Central Banks take on pure monetary policy grounds are nevertheless contested in the name of financial stability. To some extent, this has always been a possibility. The difference, now, is that institutional frameworks exist through which – implicit or explicit – challenges to Central Banks operational independence can materialize. It might be tempting to conclude, then, that Central Banks should stay away from financial stability and concentrate exclusively on ensuring price stability. This, unfortunately, is impossible, if only for reasons that Charles Goodhart has well explained in a previous paper: ultimately, Central Banking is about providing liquidity and liquidity provision is an essential and central component of financial stability. What can we conclude?   First, central banking is not only about monetary policy but also involves an essential component of financial stability. This seems to me a broad consensus coming out of the crisis.

Jean-Pierre Landau: The role of central banks – lessons Remarks by Mr Jean-Pierre Landau, Deputy Governor of the Bank of France, at the VIth International Symposium of the Banque de France on “Which regulation for global imbalances?”, Paris, 4 March 2011. *  *  *  I am going to talk about the relationship between monetary policy and financial stability. This topic is abundantly debated. I will take, however, a modest approach and deal only with some operational aspects. These are, nevertheless, crucial since the essence of modern Central Banks is their operational independence. It is therefore relevant to ask how it might be affected or impacted by the search for greater financial stability. The starting point is that financial frictions matter. They matter both for financial stability, which is obvious, and for the transmission of monetary policy, a point which should have been obvious but was somehow forgotten. Prior to the crisis, most of our macro models tended to represent the transmission mechanisms through a simple, immaculate, intertemporal substitution effect whereby changes in policy rates would induce expenditures shifting across time. Money and financial institutions play almost no role in that mechanism, as credit was implicitly supposed to respond only to interest rate movements. What do the words “financial frictions” exactly mean? I will interpret those terms as encompassing the conjunction of maturity transformation and leverage which drives the expansion or contraction of financial institutions’ balance sheets, thus the overall equilibrium in credit markets, including securitized markets.