But whether incipient bubbles can be detected in real time and whether, once detected, they can be defused without inadvertently precipitating still greater adverse consequences for the economy remain in doubt. It may be useful, as a first step, to consider both the economic circumstances most likely to impede the development of bubbles and the circumstances most conducive to their formation.
Given that short-term interest rates are too blunt a tool to safeguard financial stability, financial stability should not become an additional independent objective of monetary policy. Instead, financial stability is best ensured by macro-prudential policy with its own set of instruments. However, this does not mean that macro-prudential policies cannot or should not be carried out by central banks.