The second realignment that is taking place is based on the post-crisis realisation that financial stability cannot be secured solely through a combination of macroeconomic policies aimed at price stability and microprudential supervision aimed at the safety and soundness of individual financial institutions. 16. Price stability is not sufficient to achieve financial stability. Sharp increases in asset prices, even in a climate of relatively low consumer price inflation, have typically led to credit booms and risky behaviour that eventually undermined financial stability. Likewise, prudential rules to ensure the safety of individual banks have not been sufficient to keep the banking system as a whole safe. Inter-linkages and common exposures across institutions can multiply aggregate risks and destabilise the system. 2  BIS central bankers’ speeches  17. Hence the resurgence of interest in what is called the macroprudential dimension – policies and tools aimed at containing risks in the financial system as a whole. However, macroprudential policies are still at an experimental stage. Different countries have adopted different measures in the name of sustaining systemic stability, ranging from limits on aggregate credit and caps on debt-to-income ratios to taxes on asset market transactions and controls on capital inflows. 18. Singapore has been experimenting, since 1996, with its own toolkit of macroprudential measures to tame excesses in the housing market. While we do not as yet have a completely coherent policy framework, the main outlines of Singapore’s approach are becoming clearer.
Price stability, as everyone realizes, may be defined in many ways, with somewhat different consequences for the execution of monetary policy. When the index for measuring inflation is chosen, a number of different considerations have to be taken into account. The index has to be reasonably broad and give a picture of price developments in the economy as a whole. It is an advantage if it is also well established and regularly published with a short time lag. In addition, it is desirable that the index is seldom revised. All these factors bear out the suitability of the consumer price index (CPI) . Thus, the Riksbank’s inflation target has been expressed in terms of a change in the official consumer price index. BIS Review 56/1997  -8-  Figure 5  CPI an d U n d e r lyin g In flatio n Pe r ce n tage 12-m o n th ch an ge 6 .0  6 .0  CP I  5 .0  5 .0  Un derl y i n g do m es tic in fl ati o n  4 .0 3 .0  4 .0 3 .0  2 .0  2 .0  1 .0  1 .0 0 .0  0 .0 92  93  94  95  96  97 -1 .0  -1 .0  Sources: S tatistics S weden and the R iksbank One problem with the CPI is that it is affected by temporary influences on inflation.