As there is empirical evidence that protracted low interest rates may have fostered financial market participants’ grog risk appetite and contributed to the dynamic growth of credit aggregates worldwide via this risk-taking channel in the monetary policy transmission, the events of the past 12 months also throw up some serious questions on the role of monetary policy.
The debate about monetary policy and financial markets is too often slanted towards the question of how to deal with asset price bubbles. Here, the current majority view is: a) monetary policy cannot and should not target asset prices; b) monetary policy should not prick asset price bubbles; c) monetary policy should focus on limiting the fallout from bursting bubbles ex post.