When monetary policy is ultra-accommodative, prudential regulation, either of the macro or micro kind, is probably not a sufficient defence. In part, this is because, as Fed Governor Stein so succinctly put it, monetary policy “gets into every crack”, including the unregulated part of the financial system.
10 In part, ultra accommodative monetary policy creates enormously powerful incentive distortions whose consequences are typically understood only after the fact. The consequences of exit, however, are not just felt domestically, they could be experienced internationally. Spillovers Perhaps most vulnerable to the increased risk-taking in this integrated world are countries across the border.