Monetary policy for financial stability

Keynote speech by Mr Jaime Caruana, General Manager of the BIS, at the 52nd SEACEN Governors' Conference, Naypyidaw, 26 November 2016.

Some widely cited models find that tightening monetary policy to reduce the probability of financial crisis ("leaning against the wind") has near-term macro costs that appreciably exceed the long-term output gains. However, these models make assumptions that tend to underestimate the net benefits of such a policy. Relaxing some of these strict assumptions suggests that leaning early as part of a systematic response from monetary policy over the whole financial cycle can yield significant economic benefits.