The focus of discussion to-date has been on whether and how monetary policy can be used alongside regulatory policy to address financial stability risks. •  An interesting question is: can regulatory policy be used alongside monetary policy to help achieve macroeconomic stability? Macroprudential tools aimed at stabilising asset markets could have positive spillovers in moderating inflation. •  In fact, in Singapore, we employed macroprudential measures quite deliberately to help address inflation concerns as well, not just financial stability. During 2010–2012, Singapore’s inflation rate averaged about 4%, more than twice as high as our historical average. About half of this inflation was attributable to rapidly rising housing costs and car prices. •  Housing costs, represented by actual rentals and imputed rentals on owneroccupied housing, makes up a significant share of Singapore’s consumer price index. •  Car prices, while making for a much smaller share of the CPI, rose by double digits as exuberant buyers auctioned for the fixed number of permits that the government issues for buying cars. •  Low interest rates and abundant liquidity – reflecting easy monetary conditions globally – helped to fuel strong demand for both houses and cars. Monetary policy – in the form of an appreciating exchange rate – reduced imported inflation to close to zero but was not as effective in curbing price pressures in the two asset markets: houses and cars.
•  The interconnectedness among institutions propagates and magnifies shocks across the system. •  The stability of the parts does not equate the stability of the whole. But eight years after the outbreak of the crisis, as the latest BIS annual report points out “macroeconomic stability and financial stability remain uncomfortable bedfellows.” 1 •  The interactions between macroeconomic stability and financial stability are not well understood. •  Monetary policy and regulatory policy have tended to be conducted independently. We need to get a better handle on financial instability: what causes it and how can it be avoided? There are a few emerging propositions. First, credit cycles have strong implications for financial stability. •  Moritz Schularick and Alan Taylor describe financial crises as “credit booms gone wrong.” 2 Both the level and growth of credit matter for financial stability. •  Claudio Borio and Piti Disyatat argue that both the amplitude and duration of credit cycles exceed those of business cycles due to what they call “excess financial elasticity.” 3 Debt and financial imbalances build up over successive business cycles until they reach a breaking point. •  Frederic Mishkin points to how excessive credit can fuel asset price bubbles, whose eventual bursting can lead to damaging episodes of financial instability. Second, monetary policy has an influence on the credit cycle and hence on financial stability.