If domestic policy-makers and other economic actors delay necessary reforms and adjustments on the expectation that the central bank may have to provide renewed support should market conditions deteriorate, monetary policy may end up being subject to a shortterm bias.
Such a strategy could give rise to a regime of “financial dominance”, which Hervé Hannoun, the Deputy General Manager of the Bank for International Settlements, recently described as a situation in which “monetary policy becomes increasingly dominated by short-term concerns about adverse financial market developments”.1  1  See Hannoun, Hervé (2012 ), “Monetary policy in the crisis: testing the limits of monetary policy”, speech at the 47th SEACEN Governors’ Conference, 13–14 February.