The interest rate r is set to minimise fluctuations in the economic cycle and inflation E∑  [(  −  ∗  ) +  (  −  ∗  ) ],  while c is set to stabilise the financial cycle E∑  [  −  ∗  ]. A theoretical result is that coordination, that is, alternative A, is in general preferable to separating the two types of policy. The reason is that alternative B is a special case of A. A policy-maker who can choose both r and c to stabilise both economic activity and inflation as well as the financial cycle (or two policy-makers who can fully coordinate their decisions on r and c) always has the possibility to separate the decisions, that is, to go from A to B. A should therefore not reasonably be able to lead to a poorer result than B. This does not necessarily mean that coordination is always a good idea in practice. It may be the case that, in reality, there are costs linked to coordination that can be reduced or avoided if one separates the decisions on monetary policy and macroprudential policy. For instance, it may be more difficult to evaluate and forecast economic policy if different instruments are used at the same time to try to attain different targets.8 A related argument in favour of separating both types of policy concerns the risks of a decline in confidence in monetary policy.
The crisis gave rise to a new policy area – macroprudential policy – which partly works by influencing the volume of credit in the economy, in roughly the same way as monetary policy. To me, it is fairly obvious that these two policy areas need to interact. If monetary policy is to carry out its tasks well, then macroprudential policy must function properly and most likely also vice versa. The crisis also made necessary a monetary policy that was in many leading countries more expansionary than ever before, and which was conducted in ways not previously tested. Given this, the debate that has arisen on international monetary policy spillover effects is perhaps not particularly remarkable. We do not yet know what our final conclusions will be with regard to these two areas. These are a couple of the loose threads that I am not able to tie up here today. However, a certain amount of new thinking will probably be required, both with regard to monetary policy and financial supervision and the regulation of the financial markets – but also concrete  31  See Ostry and Ghosh (2013). 32  A further possibility that I will not take up here, but which has been tested in emerging markets in particular, is to use capital regulation. For a detailed and partly critical review of the efficiency of capital regulation, see Klein (2012). BIS central bankers’ speeches  15  measures.