Strengthened capital and liquidity buffers and improved incentives to assess and manage risk should all help reduce the pro-cyclicality of the financial system, and, in the new configuration of the financial services industry more than ever, help monetary policy to attain its traditional objectives. But should monetary policy itself embody in its objective function the health of the financial system?
As Chairman Bernanke and others have noted, we cannot afford to ignore the health of financial markets when setting monetary policy. It would be difficult to disagree with this statement, and we should try to make it operational considering however that its application may have different degrees of intensity.