The parallel idea of financial dominance is more recent than fiscal dominance.2 Financial dominance refers to the possibility that the condition of the banking system could become a constraint, or dominant influence, on monetary policy, effectively forcing the central bank to pursue second- or third-best monetary policies in order to maintain financial stability.
Is the spill-over from financial instability to monetary policy a realistic threat? Can financial stability considerations lead the central banks to tolerate too high inflation, just to keep the banking sector afloat? In principle it is easy to see why it could be.