In times of crisis, as we have seen during the current crisis, other more unconventional methods can be used, such as fixed-rate lending at longer maturities and asset purchases (quantity easing) to affect longer interest rates and expectations of future short rates, and foreign-exchange intervention to prevent currency appreciation or even to induce currency depreciation. The authority responsible for monetary policy is typically the central bank. Financial-stability policy has the objective of maintaining and promoting financial stability. Financial stability can be defined as a situation where the financial system can fulfil its main functions of submitting payments, channelling saving into investment, and providing risk sharing without disturbances that have significant costs. The available instruments are, under normal circumstances, supervision, regulation, and financial-stability reports with analyses and leading indicators that may provide early warnings of stability threats. In times of crisis, authorities may use such instruments as lending of last resort, variable-rate lending at longer maturities (credit policy, credit easing), special resolution regimes for financial firms in trouble, government lending guarantees, government capital injections, and so forth. The responsible authority or authorities vary across countries. In some countries it is the central bank, in other countries there is a separate financial supervisory authority, and sometimes the authority is shared between different institutions. Financial-stability policy and monetary policy are conceptually distinct, with distinct objectives and distinct suitable instruments. My point here is that this has to be taken into account when considering the lessons of the financial crisis for monetary policy.

Another conclusion is that interest-rate policy is not enough to achieve financial stability. The policy rate is an ineffective instrument for influencing financial stability, and policy rates high enough to have a noticeable effect on credit growth and house prices will have a strong negative effect on inflation and resource utilisation, even in sectors that are not experiencing any speculative activity. The use of the policy rate to prevent an unsustainable boom in house prices and credit growth poses major problems for the timely identification of such an unsustainable development, as well as for the assessment of whether policy-rate adjustment would have any noticeable impact on the development, and of whether, in the longer run, the development of inflation and resource utilisation would be better (Bean et al. 2010, Kohn 2008, 2009). Other instruments like supervision and regulation, including appropriate bank resolution regimes, should be the first choice for financial stability. Preventing a financial crisis requires not only improvements in the supervision of financial institutions, but also a greater emphasis on the supervision of the financial system as a whole. As regards the regulatory framework, generally, to the extent that financial instability depends on specific distortions, good regulation should aim to attack these distortions as close to the source as possible. Macro-  3  See Svensson (2003) for a discussion of policy options before and in a liquidity trap. 4  See Assenmacher-Wesche and Gerlach (2009), Bean (2009), Bean et al. (2010), Bernanke (2010), Dokko et al. (2009), IMF (2009).