THE EFFECTS OF MONETARY POLICY ON THE FINANCIAL ECONOMY
By David Aikman
“ The key risk factor influencing the outlook for the economy and for financial stability is the outlook for monetary policy . The rise in rates has played a significant role in the difficulties we are currently facing . An important question is whether central banks possess sufficient tools to bring inflation back to target while also ensuring financial stability .
“ If there is a concern that rates need to be further increased to reduce inflation , will this lead to additional problems in the banking system ? In such a scenario , are there alternative measures that can be employed to mitigate the strains on banks , such as providing liquidity to the banking system ? What are the limits to such actions ? “ There is an ongoing and lively debate regarding the extent to which we can rely on these types of tools or if , when push comes to shove , central banks will be forced into making an uncomfortable trade-off between achieving price stability and financial stability .”
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