Under Article 105 (5), the Treaty establishing the European Union assigned to the Eurosystem the task of contributing “to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system”.
The first conclusion that I would draw to your attention is that if monetary policy aims primarily at stabilizing income in the face of a permanent supply shock, it will produce the opposite result, i.e. unstable output and inflation. Let’s consider now the case in which the central bank aims primarily at price stability, instead of stabilizing income.