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Reviving a Policy Marriage

WASHINGTON, DC – Not long ago, the separation of financial supervision and monetary policy was in vogue in many countries. Some countries – like the United Kingdom and Australia – went so far as to unbundle these functions by assigning responsibility for financial stability to specialized agencies and extricating their central banks from financial supervisory issues altogether. In the aftermath of the global financial crisis, however, financial supervision and macroeconomic management have been forced to reunite.

This rapprochement is a consequence of the growing recognition that asset-price cycles must be taken into account for both macroeconomic management and financial supervision. Prior to the crisis, asset-price cycles were seen by many as basically harmless or, at least, as a relatively insignificant monetary-policy channel. Even when the frequent appearance of asset-price bubbles was acknowledged, most believed that efforts to detect and prick them at an early stage would be impossible – and potentially harmful. Interest-rate cuts after bubbles burst would be a safer way to safeguard the economy.