Monetary Policy. While the first two policy challenges are shared among regulatory and financial agencies, the third lies solely with central banks. In the wake of the crisis, we need to consider carefully the view that central banks should assess the effect of monetary policy on financial stability and, in some instances, adjust their policy decisions to take account of these effects.
The dramatic rise in housing prices, and the associated high amounts of leverage taken on by both households and investors, occurred during an extended period of low inflation. Some have suggested that, by not raising rates because inflation remained subdued, monetary policy in the United States and elsewhere may have contributed to the magnitude of the housing bubble.