First, it requires placing greater weight on the ability of financial institutions and the financial system as a whole to withstand financial shocks without the authorities having to use macroprudential instruments – that is to say, on structural reforms to the financial system.
Second, in such instances, one could consider using monetary policy – the short term policy interest rate – to lean against the wind of financial stability risks.17 The use of monetary policy to address financial stability concerns raises two distinct but closely related sets of questions.