Central banks have fought hard to establish credibility by focusing on measurable goals, maintaining clear communications with the public, and being transparent and accountable in achieving these goals. The focus on inflation, a simple observable variable has helped. Having a central bank with multiple mandates creates risks of policy dilution and conflicting goals. In contrast with inflation, or even employment, financial stability is a fuzzy concept with many dimensions that are hard to encompass in a single indicator. Attempting to do so risks ending with a narrow view of financial stability, but having a broader, less precise definition of financial stability makes it hard to establish credibility and accountability for achieving it. On a more pragmatic front, there are good reasons to have banking supervision conducted outside the central bank (which I will not address now), and many countries follow this institutional arrangement. This should be considered when thinking about the involvement of the central bank in financial stability because it is desirable that micro and macro aspects of financial regulation be well coordinated to avoid sending conflicting messages to regulated entities. For these reasons, the institutional setting for monitoring and preserving financial stability will likely vary across countries. But the natural interest of central banks in financial stability and their advantages in providing a systemic view of the financial sector and the economy suggest that they should be involved at some level.
Rodrigo Vergara: Macroeconomic and financial stability – challenges for monetary policy Opening remarks by Mr Rodrigo Vergara, Governor of the Central Bank of Chile, at the XVI Annual Conference on “Central banking, analysis and economic policies” of the Central Bank of Chile, Santiago de Chile, 15 November 2012. *  *  *  I thank Sofia Bauducco, Gonzalo Castex, Maria Consuelo Edwards, Luis Oscar Herrera, Kevin Cowan, and Claudio Raddatz for helpful comments. Good morning. Welcome to the Central Bank of Chile’s sixteenth annual conference on Central Banking, Analysis and Economic Policies. This year’s version is about “Macroeconomic and Financial Stability: Challenges for monetary policy.” We are expecting two exciting days of learning and discussion on topics at the forefront of academic and policy research on macroeconomic and financial stability. The interaction between academics and policy makers fostered by this conference provides an important opportunity to learn from each other and share views and experiences that will help us improve our policy decisions and hopefully go home with new ideas for research. Today and tomorrow we will reflect on the role of central banks in preventing and reacting to financial exuberance and financial crises. The discussion will focus on two important policy questions: first, did the conduct of conventional monetary policy before the crisis contribute to shaping it? And second, how should monetary policy react to a crisis? In particular, we will discuss the efficacy of conventional monetary and macro-prudential policy action in ameliorating the effects of financial crises.