policy affects asset prices and credit, whose developments are crucial for financial stability, borio and zhu ( 2008 ) argue that such a channel exists. altunbas, gambacorta and marques - ibanez ( 2010 ), maddaloni and peydro ( 2010 ) find empirical evidence consistent with this channel. see woodford ( 2010 ), curdia and woodford ( 2010 ), and lambertini, mendicino and punzi ( 2011 ), among others. on the contrary, it is generally accepted that a flexible inflation targeting ( fit ) approach, if sufficiently forward looking, should ( perhaps informally ) take account of the fact that “ significant financial instability invariably will also have a significant impact on activity and inflation ” ( bean, 2003, p. 18 ). in practice, however, in the design of monetary policy actions it might be very difficult to take account of developments that are subject to considerable uncertainty and may materialize with long lags due to cumulative and non - linear effects of financial imbalances. since “ the real world is generally complex and non - linear, [ even ] within a well specified fit framework, the implicit monetary policy reaction function would then also be non - linear ( and possibly very complex, as it would not be possible to rely on certainty equivalence ) ” ( visco, 2003, p. 24 ), indeed, considering a taylor rule as a description of the normal conduct of monetary policy, i argued that for some purposes a linear rule with the interest rate expressed as a function also of asset price misalignments could be a simple and linear approximation ( a taylor “ approximation ”, after brook taylor the mathematician, within the taylor “ rule ” introduced by john taylor the economist! ) of how central banks would behave ( or perhaps should have behaved ) in a non - linear and complex environment. bis central bankers ’ speeches and the propensity to take risks. at the same time, macroprudential policies will likely react to, and affect, credit growth and asset prices, influencing the monetary policy transmission mechanism. these interactions need to be well understood and taken into account in formulating the two policies. two research projects recently carried out at the bank of italy have focused on the interaction between monetary policy and macroprudential policy. the first study concentrates on the recent housing bubble in the united states. 9 the results indicate that a tighter monetary policy by the fed between 2002 and 2006 would have not been sufficient to

” the role of macroeconomic policies in the global crisis ”, banca d ’ italia, occasional papers, no. 69. curdia, v., and m. woodford ( 2010 ), “ credit spreads and monetary policy, ” journal of money, credit and banking, 42 ( 6 supp. ). hanson, s., a. kashyap and j. stein ( 2010 ), “ a macroprudential approach to financial regulation ”, journal of economic perspectives, forthcoming. lambertini, l., c. mendicino and m. t. punzi ( 2011 ), “ leaning against boom - bust cycles in credit and housing prices ”, this conference. maddaloni, a., and j - l. peydro ( 2010 ), “ bank risk - taking, securitization, supervision and low interest rates. evidence from the euro area and the u. s. lending standards ”, ecb working paper, no. 1248. visco, i. ( 2003 ), “ discussion of “ asset prices, financial imbalances and monetary policy : are inflation targets enough? ” by charles bean ”, bis working papers, no. 140. woodford, m. ( 2010 ), “ financial intermediation and macroeconomic analysis ”, journal of economic perspectives, forthcoming. bis central bankers ’ speeches