Stan Fischer: Monetary Policy, Financial Stability, and the Zero Lower Bound II: “How Should Central Banks Incorporate Financial Stability Considerations in the Conduct of Monetary Policy?…

…The first response of policymakers to the question of whether monetary policy–defined as the short-term policy interest rate–should be used to support financial stability is to say that macroprudential tools, rather than adjustments in short-term interest rates, should be the first line of defense…. It is important to acknowledge that there remain cases in which macroprudential tools are either not available or have not been sufficiently tested… or… may be in conflict with other objectives such as widespread access to credit.

The effective lack of such tools has two important consequences. First, it requires placing greater weight on the ability of financial institutions and the financial system as a whole to withstand financial shocks without the authorities having to use macroprudential instruments–that is to say, on structural reforms to the financial system. Second, in such instances, one could consider using monetary policy–the short term policy interest rate–to lean against the wind of financial stability risks….

Let me concede that it is easier to pose these questions than it is to answer them definitively. The issues are both deep and interesting. Along with other monetary policy issues, particularly the role of the lender of last resort in a world of significant uncertainty, they deserve the attention the profession in both academic and governmental institutions is, will be, and should be giving them.