may be very different depending on the starting levels of household and corporate debt and debt servicing capacity. when are monetary policy adjustments likely to be helpful from a financial stability perspective? this is likely to be in situations where asset and credit markets are buoyant and prudential policies alone are insufficient to constrain a build - up of financial system stress. for example, by themselves, macro - prudential policies such as lvr restrictions may have limited effects on asset price inflation and the credit cycle. macro - prudential policies must remain consistent with micro prudential principles and are therefore not generally scalable in the way that interest rates are. further, the impact of macro - prudential policies can be eroded if there is disintermediation outside the regulatory perimeter, something which becomes more likely if interest rates are set at stimulatory levels. thus, in a situation where inflation is near the target, but asset markets are rising sharply, assistance from monetary policy can be an important means of meeting financial stability objectives. many countries are currently actively considering how to manage the potential effects of an extended period of loose monetary policy on financial stability. for example, the bank of england has recently included a financial stability knock - out in its forward guidance on monetary policy ( kohn ( 2013 ). bis central bankers ’ speeches as noted by federal reserve governor, jeremy stein ( 2012 ), monetary policy “ gets in all the cracks ” of the financial system. it affects the cost of credit for all borrowers, including those that may be avoiding macro - prudential regulations as a result of disintermediation. other policy initiatives that seek to alleviate supply - demand imbalances in asset markets can also be helpful. in the case of housing markets for example, this might involve regulatory reform around zoning and other planning restrictions, or changes in taxation that reduce the incentive for speculative investment. should monetary policy respond to a request from the prudential authorities for tighter policy? the key test is whether this is consistent with the primary monetary policy objective of price stability. if monetary policy is diverted too far or too long from its primary objective of price stability there is a risk that the transparency and credibility of monetary policy will be damaged, thus reducing the long - run effectiveness of monetary policy in achieving its prime objective. this potential problem has been emphasised for example by svensson ( 2011 ). policymakers and academics around the world have debated the appropriateness of tightening monetary policy on financial

. by and large, the exchange rate movements delivered by the market have served canada well. trying to hold the dollar constant would have given us larger fluctuations in unemployment, output and inflation. nonetheless, for many years we did have a policy of routinely using our foreign reserves to resist, in an automatic fashion, any significant upward or downward pressure on the dollar. for example, between 1995 and 1998, we intervened roughly 150 times. we weren ’ t targeting a particular level for the exchange rate but simply smoothing its movements. this reflected a belief at the time that markets did not function efficiently and could give rise to volatility that could be destabilizing. but this view gradually gave way to the weight of evidence and experience. by 1998, we had concluded that such interventions weren ’ t particularly effective. we saw the futility of attempting to moderate exchange rate movements caused by changes in the underlying fundamental factors. trying to counter them was a bit like tapping on the brakes while skidding on ice. it can help, momentarily, but not by much. so where does that leave us? we do have a policy framework that would allow us to intervene in the unlikely event that it ’ s needed. that could happen under two scenarios. the first would be a market breakdown with extreme price volatility. buyers or sellers would be increasingly unwilling to transact, indicating a severe lack of liquidity in the canadian - dollar market. the second would be sharp currency movements that seriously threaten the conditions that support sustainable, long - term economic growth. in a market breakdown, intervention would aim to restore market functioning and would likely be quite short - lived. in extreme currency movements, it ’ s understood that intervention would be part of a broader set of policy changes to re - establish confidence in canadian economy. this framework is transparent — it is posted on our website. thus, we are ready to intervene, if necessary. but as i said, we have not seen the need to do so at any time throughout the past two — often turbulent — decades. there have, however, been a couple of occasions over that period when canada participated in concerted intervention along with other countries. in 2011, canada joined an action to stem excess volatility and disorderly movements in the exchange rate of the japanese yen following 2 / 6 bis central bankers'speeches the earthquake and resulting tsunami and nuclear crisis at the fukushima nuclear plant. the intervention involved selling the yen against our respective domestic currencies to send a clear