The understanding around that time was that monetary policy directed at maintaining price stability would lessen both the incidence and the severity of financial instability. The argument was that price stability obviates the information problems for both borrowers and lenders and ensures financial stability through efficient allocation of resources.
Studies based on the experience of advanced countries such as the US, the UK, Canada and Japan also concurred with the view that price instability contributed to financial instability (Bordo and Wheelock, 1998).5 Did the financial crisis of the 21st century with its epicenter in the advanced countries change the world view of central bank objectives?