Macroeconomic Stability, Financial Stability, and Monetary Policy Rules


  • This paper dwells in part on some of our previous papers, including joint work with Koray Alper (Central Bank of Turkey). We are grateful to Koray Alper, Karim El Aynaoui, participants at the Inter-American Development Seminar for Central Banks and Finance Ministries (Washington, DC, 21–23 September 2011) and two anonymous referees for helpful discussions and comments. However, we bear sole responsibility for the views expressed here. A more detailed version of this paper is available upon request.

Pierre-Richard Agénor

School of Social Sciences

Oxford Road

University of Manchester

Manchester M13 9PL



This paper reviews arguments for and against attributing an explicit financial stability objective to monetary policy. The discussion is conducted from the perspective of middle-income countries (MICs), where bank credit plays a critical role both on the supply and demand sides. It also discusses, on the assumption that a more proactive role is desirable, what monetary policy should react to and to what extent it should be combined with macroprudential regulation. There are robust arguments in favour of monetary policy reacting in a state-contingent fashion to a measure at the private-sector credit gap, not only because of financial stability considerations but also because of the high degree of uncertainty regarding real-time estimates of the output gap in MICs. Nevertheless, monetary policy is not a substitute for macroprudential regulation; in particular, it cannot address the cross-section dimension of systemic risk.