To pre-empt such situations, academics and commentators have often invoked the need for monetary policy to lean against financial imbalances, but this would imply a deviation from its price stability mandate, at least in the short-run.5 Monetary policy is able to “get into all the cracks” of the financial system.
But it is too blunt a tool to address specific risks and imbalances and would be likely to generate large macroeconomic costs if it tried, as many have argued.6 In a nutshell, the “leaning” versus “cleaning” debate has, in my view, focused too narrowly on monetary policy alone.