At the same time, my sense is that the balance is clearly tilted toward the conclusion that macroprudential policies—through-the-cycle resilience, stress tests, and the countercyclical capital buffer (CCyB)—may be better targeted to promoting financial stability than monetary policy.1 Before I wade into the lessons from past research and experience, I would like to highlight that this question is not just academic.
As you know, the economy, monetary policy, and financial stability are intertwined. For example, the past three recessions were preceded by some combination of elevated asset prices, rapid increases in borrowing by businesses and households, and excessive risk-taking in the financial sector. These financial vulnerabilities have amplified adverse shocks to the overall economy time and again.