In the context of monetary policy in an inflation targeting regime, those situations could be accommodated by escape clauses. But, more in general both objectives should be addressed with more than one instrument. The overall purpose of financial stability is to ensure the proper functioning of markets and to avoid having to arrive at the degrees of turbulence and dislocation we have witnessed in the past year. For this reason, financial regulation plays a major role in granting financial integrity. At the beginning, regulation focused on the strength of individual institutions. However, the tensions we have seen show how individual fragility may quickly evolve into systemic problems. The interrelationships among financial institutions and the proper operation of the markets where liquidity is traded are essential ingredients of a market economy, but these characteristics are also the channels of financial contagion, as recently seen. So it is crucial to have a systemic vision, not only from the perspective of how the different institutions relate to each other, but also on how the different types of financial and operating risks are intertwined, creating potential vulnerabilities. Regarding price stability, conducting monetary policy within an inflation targeting scheme is appropriate, and recent experience shows that it may provide ample room for expansionary policies when facing a global recession such as the current one. There will be a long debate and a number of research papers on the proper mechanism to secure financial stability and how it should be combined with monetary policy management.
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