The costs of not taking pre-emptive action before a bubble bursts are potentially too high and, with regard to the response of the official sector, produce a destabilizing asymmetry that only encourages future misdeeds. 20 In addition, central banks are no longer as dismissive about the feasibility of identifying potential sources of financial instability before their macroeconomic consequences are felt.
The one remaining complication concerns the third tenet described earlier – the fact that traditional monetary policy instruments are often a very heavy-handed means of dealing with financial sector vulnerabilities, especially if the potential source of instability is limited to a specific sector or area of activity.