imf calls capital - flow management measures ( cfms ), including capital controls ( residency - based cmfs ) ( imf 2011b ). the authorities may also consider a fiscal contraction and financial - stability measures to improve the situation. this is a highly stylized and very simplified thought experiment. still, i think it conveys an important insight, namely that a substantial part of the problem is due to the central bank ’ s unwillingness to accept the nominal and real appreciation, even though this appreciation is a natural equilibrium response to the lower world interest rate. are the reasons for that unwillingness so important that they take precedence over the problematic consequences? 7 more expansionary monetary policy in the u. s., for instance in the form of lower long rates due to lsaps, tends to depreciate the dollar, all else equal. does this mean that the u. s. is conducting a beggar - thy - neighbour policy that hurts other countries? i do not see it this way. the policy response to recent capital inflows to emerging - market economies is further discussed in the imf staff framework for policy advice on managing capital inflows, imf ( 2011b ). bis central bankers ’ speeches a weaker currency is a normal consequence of more expansionary policy in an open economy. each of the countries affected has the option of adjusting its own monetary policy in response. all countries cannot depreciate their currency against each other, but all countries can conduct more expansionary policy if they prefer, with conventional ( lower policy rates ) or unconventional methods ( such as asset purchases ). more expansionary monetary policy will increase real activity, world trade, and both exports and imports, which in a situation of underutilised resources is to the benefit of all. monetary policy is not a zerosum game. references adrian, tobias and hyun s. shin. 2011. “ financial intermediaries and monetary economics. ” in friedman, benjamin m., and michael woodford, eds., handbook of monetary economics, volume 3a, chapter 12, pp. 601 – 650. elsevier. assenmascher - wesche, katrin, and stefan gerlach. 2010. “ credit and bubbles. ” economic policy 25 ( 63 ), pp. 437 – 482. bean, charles r. ( 2009 ), “ the great moderation, the great panic and the great contraction. ” schumpeter lecture, barcelona,

for the forecast of inflation and resource utilisation, including the conduct of financial - stability policy when appropriate – remains in my view the best - practice monetary policy before, during, and after the financial crisis. monetary policy and financial - stability policy are different this leads me to the more general question of what the relation between monetary policy and financial stability should be. for instance, it is sometimes said that the objectives of monetary policy should be expanded to include financial stability ( eichengreen, rajan, and prasad 2011, and eichengreen et al. 2011 ). such suggestions give the impression that monetary policy and financial stability are the same thing. but they are not. it is important to conceptually distinguish financial - stability policy from monetary policy and avoid conceptual and practical confusion between the two policies. confusion risks leading to a poorer outcome for both policies and makes it more difficult to hold the policymakers accountable. trying to use monetary policy to achieve financial stability leads to poorer outcomes for monetary policy and is an ineffective way to achieve and maintain financial stability. different economic policies, such as fiscal policy, monetary policy, and labour market policy, can be distinguished according to their objectives, the policy instruments that are suitable for achieving the objectives and the authority or authorities that control the instruments and are responsible for achieving the objectives. from this point of view, it is clear that monetary policy and financial - stability policy are distinct and different, and understanding this is important. monetary policy, in the form of flexible inflation targeting, has the objective of stabilising both inflation around the inflation target and resource utilisation around a sustainable level. under normal circumstances, the suitable instruments are the policy rate and communication, including the publication of forecasts of inflation, the real economy and ( by some central banks ) the policy rate. in times of crisis, as we have seen during the financial crisis, in particular when the policy rate is at or close to the zero lower bound, other more unconventional instruments can be used. these instruments include fixed - rate lending at longer maturities, asset purchases ( quantitative 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. in many countries, including all the member states of the eu, the central bank is given exclusive authority over monetary policy by statute and various measures to protect this policy independence are put in place. financial -