After the Financial Crisis
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Edited by Sylvester Eijffinger and Donato Masciandaro
Chapter 9: How Should Central Banks Deal with a Financial Stability Objective? The Evolving Role of Communication as a Policy Instrument
Benjamin Born, Michael Ehrmann and Marcel Fratzscher1 Introduction The financial crisis of 2007–2010 has brought the topic of financial supervision and regulation to the forefront of the policy debate. While micro-prudential supervision had already undergone a reform process prior to the crisis, with a trend towards unified national supervisory bodies outside the central banks,2 a major overhaul of microprudential and macro-prudential regulation and supervision is on its way around the globe. Especially with regard to macro-prudential supervision, this reform process often assigns central banks a prominent role. There are a number of reasons for such an assignment. Combining financial supervision with monetary policy tasks can 1 We are grateful to a large number of colleagues in various central banks for useful discussions on the issues addressed in this chapter and for their help in retrieving some of the data employed in the empirical analysis. This chapter presents the authors’ personal opinions and does not necessarily reflect the views of the European Central Bank. 2 Recent reform efforts of micro-prudential regulation and supervision are discussed, e.g., in Herring and Carmassi (2008) and Masciandaro and Quintyn (2009). 244 The Evolving Role of Communication as a Policy Instrument 245 lead to synergies, e.g., through information gains, thereby possibly leading to a more effective conduct of monetary policy and/or to more effective crisis prevention and management (Borio, 2009). Furthermore, the lender of last resort function gives central banks a natural role in this process (Blinder, 2010). Also, it has been argued that...
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