Macroprudential regulation and financial imbalances Macroprudential regulation of banks must be based on an understanding of how systemic risk arises. This understanding has been brought a step further since the financial crisis. There is a growing academic literature on the basis for macroprudential regulation. One of the main themes is how systemic risk can arise in the interaction between the financial sector and the real economy. Research is at an early stage, and so far no specific framework stands out. Some conclusions seem, however, to be robust across the various approaches. Many studies single out rapid credit growth in particular as a symptom of rising systemic risk. The theoretical literature is based on the principle that credit is a good. Borrowing enables households to smooth consumption over the life cycle and businesses to finance investments, thus promoting prosperity. But the literature also shows that debt can lead to vulnerability. Risk can be priced too low as a result of market failures of various kinds. Mispricing can contribute to excessive debt and the build-up of financial imbalances. Regulations that counteract credit swings may lead to fewer and less severe economic downturns. Chart: Rapid credit growth leads to deeper downturns The relationship between debt and systemic risk also finds support in many empirical studies. This chart shows the results of a study conducted by Jordà, Schularick and Taylor on downturns in 14 advanced economies, including Norway. 1 The study covers the period from 1870 to 2008. The chart illustrates two important findings.
How much of this business will resist the current period of stress remains an open issue, but euro area monetary statistics have shown no sign of a major decline in these money holdings so far. -  In terms of new products, the recent emergence, at least in France, of high-yield liquid deposits that are accessible via direct banking on the internet is very likely to have reduced the interest elasticity of money. Of course, monetary policy, in the euro area and elsewhere, is not committed to react mechanically to monetary developments. Nevertheless, to make the best use of the informational role of money, central banks must be able to filter out the noise that affects current monetary data, disentangling temporary factors from shifts in trends, supply shocks from demand shocks, with the latter possibly resulting from certain financial innovations in the context of globalisation. Fully assessing the effects of financial innovation is thus a real challenge for monetary analysis. Considering the practical difficulties ahead, this seems to me to offer a fruitful field for applied research. Challenges for communication in times of stress: disentangling monetary and financial stability objectives Financial market disruptions that may follow times of exuberant financial innovation may pose significant risks to macroeconomic stability. However, by their very nature and notably the highly non-linear dynamics they may trigger, such events, as well as the magnitude and speed of their macroeconomic consequences are uncertain.