The interest rate is a blunt and unsuitable instrument for achieving financial stability and it thus makes little sense to assign the objective of financial stability to monetary policy. However, it may make sense to assign the objective of financial stability to the central bank, if the central bank is given control of the appropriate supervisory and regulatory instruments. The fact that financial-stability policy and monetary policy are different does not mean that there is no interaction between them. Similarly, monetary policy and fiscal policy are distinct policies but both have an impact on inflation and resource utilisation. The interaction between monetary policy and financial-stability policy has to be considered. Monetary policy affects asset prices and balance sheets and can thereby affect financial stability. Financial-stability  being smaller after the crisis. In Europe, Canada and the Nordic countries, commercial banks dominate the financial sector. 4  BIS Review 118/2010  policy directly affects financial conditions, which affect the transmission mechanism of monetary policy. This motivates more research on how to incorporate financial conditions into the standard models of the transmission mechanism used by central banks. The outcome might very well be that financial conditions are considered to play a larger role in the transmission mechanism and as indicators of future inflation and resource utilisation. If so, central banks would end up responding more to financial indicators, in the sense of adjusting the policy rate and policy-rate path more to a given change in a financial indicator.
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