In the early 2000s, for example, Claudio Borio and Philip Lowe had pointed out in a BIS article that low and stable inflation could not only promote financial stability, but that financial imbalances could also be built up in such an environment.16 While the development of supply will slow down price developments, it can also lead to overly optimistic risk assessments, strong credit expansion and rising asset prices.17 Although it may be difficult to use monetary policy to limit the build-up of financial imbalances, they nevertheless considered it possible and desirable to take financial stability into account in certain situations. They also advocated more cooperation between central banks and supervisors for this purpose. In the wake of the financial crisis, there was an intense debate on the possibilities for monetary policy to counteract financial imbalances and to what extent this would be desirable. Some economists, such as Frank Smets, argued that monetary policy should take into account the build-up of financial imbalances.18 Smets noted that the costs of financial crises are very high and that macroprudential policy has the most effective tools for maintaining financial stability. However, macroprudential tools are relatively untested and their effectiveness is not fully evaluated, while there is much evidence that the monetary stance affects credit build-up, liquidity and risk-taking more generally. Monetary policy tools such as large-scale asset purchases can also be difficult to distinguish from macroprudential tools in their sub-objectives and in their effects on the economy.
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