Financial instability, however, can arise even if macroeconomic fundamentals are good and monetary policy is sound, simply because of shocks that are unforeseen by policymakers or that cannot be prevented from occurring. In this case, monetary policy can also be useful because it can help forestall the negative macroeconomic consequences of financial instability.
An easier monetary policy provides a direct stimulus to the economy, as it generally leads to lower interest rates across the term structure. Lower rates reduce the cost of capital for borrowers and therefore encourage investment. They also generally boost asset prices, thereby increasing wealth and encouraging consumer spending. Researchers have also identified other channels through which monetary policy is effective.