But the latter statement that low inflation is not a sufficient condition for financial stability and the former that low inflation causes financial instability, are worlds apart. Here I would like to focus on two particular aspects, which is the trade-off question with respect to the “new environment” hypothesis and the related relevance of the problems associated with identifying asset 17 price bubbles.
In the spirit of Tinbergen if the central bank has one policy instrument, i.e. monetary policy, it can only achieve one independent goal, which is price stability. An intuitive division of labour is to assign the objective of financial stability to a financial regulatory authority, which sets up a prudential supervisory framework. This regulatory authority can but must not be the central bank.