The questions I want to address are, first, how should we take account of financial stability in the conduct of monetary policy – for example, should financial stability be another specific responsibility of monetary policy, in addition to its responsibilities for promoting maximum employment and stable prices?
It would appear reasonable that this buffer should be large enough to absorb the losses of the last crisis. It could also vary over time so that it is at its maximum in periods when credit is growing rapidly and system-wide risks are rising, and reduced in times of stress to ensure that the flow of credit is not undermined by regulatory constraints.