Managing price and financial stability objectives - what can we learn from the Asia-Pacific region?

BIS Working Papers No 533
December 2015

The international financial crisis led many central banks to adopt explicit financial stability objectives. This raises the question of how central banks deal with policy trade-offs resulting from potential conflicts between price and financial stability objectives. We analyse this issue in the Asia-Pacific region, where many economies with inflation targeting central banks have adopted macroprudential policies in order to safeguard financial stability. Using structural vector autoregressions that identify both monetary and macroprudential policy actions, our results highlight similarities in the effects of monetary and macroprudential policies on the real economy. Tighter macroprudential policies used to contain credit growth have also had a negative impact on output and inflation. The similar effects of monetary and macroprudential policies could create challenges for policy, given the frequency of episodes where low inflation coincides with buoyant credit growth.

JEL classification: E58, E61

Keywords: multiple objectives, financial stability, price stability, macroprudential instruments, monetary policy