However, a highly stimulatory monetary policy stance may lead to over-exuberant levels of credit growth, and as seen in empirical studies in the international literature, may lead to lower lending standards. If looser monitoring standards prevail on the supply of credit, the macroeconomic costs of a severe downturn may be amplified.
Macroprudential policy can help to manage the movements in credit so as to ensure that macroeconomic booms and busts are not excessively volatile. Our assessment of financial stability risks is more nuanced than debt levels per se. We look at the distribution of debt as well as its growth rate, and the sustainability of the asset values it is attached to.