US monetary policy had been relaxed in response to the September 11 attacks and other millennium shocks. The accommodative stance of monetary policy was sustained by concerns over deflationary trends. Housing markets showed signs of overheating, but when the series of interest rate hikes began, this did not, in retrospect, seem to be effective enough.
Should more determined measures of monetary policy have been adopted to burst the US housing market bubble? According to Jan Tinbergen’s famous principle, a certain number of policy targets requires an equal number of policy instruments. The challenge was that monetary policy had one tool to offer, but there were two objectives to meet, i.e. price stability and financial stability.