To elaborate, adjustment of the policy rate is something of a blunt instrument and ineffective for achieving financial stability, hence “financial imbalances” are better handled using micro-and macro-prudential instruments, such as capital and liquidity requirements.2 Macroprudential policies can contribute to reducing economic costs associated with crisis prevention as it can alleviate policy tradeoff that traditional monetary policy faces.
An appropriate mixture of orthodox monetary policy focused on price stability and macro-prudential policy oriented to the prevention of bubble formation would make it possible to achieve price stability and financial stability at the same time with minimal costs to the economy.