Knowledge Booster

  As you well know, monetary policy has powerful effects on financial markets, the financial system, and the broader economy. Conversely, financial instability, by impairing the provision of credit and other financial services, can depress economic growth, cause job losses, and push inflation too low. Accordingly, financial stability, through its effects on the Federal Reserve’s dual-mandate goals of maximum employment and stable prices, must be a consideration in the setting of monetary policy. Against this backdrop, a natural—yet quite complex—question is whether monetary policy should be used to promote financial stability. This question is hotly debated in a large and growing academic literature, and any serious answer has to be subject to considerable nuance. At the same time, my sense is that the balance is clearly tilted toward the conclusion that macroprudential policies—through-the-cycle resilience, stress tests, and the countercyclical capital buffer (CCyB)—may be better targ