In the absence of inflationary pressures as conventionally measured, excessive money and credit growth could also lead to asset price bubbles, with adverse implications for banking sector stability and lagged conventional inflation. Thus, the Reserve Bank will have to face ongoing challenges to provide appropriate liquidity to the system so as to ensure growth in non-inflationary environment.
In making the tradeoff I just described, the marginal benefit of using easier policy to reduce the expected unemployment gap is greater when the gap itself is large – that is, when unemployment is far above target.