Even if the monetary authorities do not choose to behave in this fashion, market perceptions that they may be forced to do so may actually encourage speculative attacks on currencies and eventually a process of self-fulfilling expectations.1 Conversely, attempting to pursue stabilising macroeconomic policies when the financial system is already fragile can lead to institutional failures, giving rise to both heavy costs for national Treasuries and important negative feedback effects on the real economy.2 These processes were seen in Sweden, Finland and Mexico and still more recently in a number of Asian countries.
A stronger financial system would alleviate both macroeconomic problems. In the same spirit, it should also be noted that unstable macroeconomic policies can also contribute to financial instability through asset price bubbles and other channels. In short, monetary stability and financial stability are two sides of the same coin and central bankers should be concerned about both.