Price And Financial Stability In Modern Central Banking

It was not until the recent global crisis that financial stability was recognized as a central objective of central banks among advanced economies. However, the concerns for financial stability in emerging markets economies are much more long dated, and come from repeated experiences dealing with serious financial crisis. This paper reviews price and financial stability in central banking. It argues that price stability can be achieved with a flexible inflation-targeting regime, as they have succeeded in many emerging markets. Financial stability, in turn, requires micro supervision to insure strength of balance sheets of financial institutions. Nevertheless, this may not be enough to deal with financial stability as the interactions among institutions and their behavior along the business cycle may create fragilities. Macroprudential tools may complement regulation to insure financial stability. The paper discusses on the instruments for financial stability and the interactions between financial and price stability, which brings new challenges to central banking.