Tightening Financial Regulation While Loosening Monetary Policy : A Risky Policy Mix

The strengthening of financial regulations after the financial crisis had further negative impacts on market stability and sentiment, and monetary policy had to be made unusually accommodative in order to offset this impact. During the process of balance sheet adjustment, however, accommodative monetary policy has only limited impact, and also creates a number of side effects. Referring to past experience in both the US and Japan, the author argues the importance of refraining from tightening regulations to the point of forcing an excessive dependence on monetary policy, and makes the case for focusing not only on monetary easing and making the financial system more sound, but also on supplying risk money