National Tamers versus Global Tigers
Chapter 3: Monetary and financial authorities
Monetary and ﬁnancial stability constitutes a shared objective that is pursued jointly by the authorities of each country, but with a clear separation of roles and instruments. ‘Monetary stability’ implies the absence of inﬂation or deﬂation in the prices of goods and services. In the majority of countries the responsibility for ensuring monetary stability is entrusted to the central bank, which conducts monetary policy accordingly. Price stability can also be pursued by means of administrative controls managed directly by government authorities, but these instruments generally prove ineﬀective in the medium term and provoke severe distortions in the functioning of the economic system and in the allocation of resources. In fact, price controls are typical of planned economic systems and have only been used by market economy countries in exceptional circumstances (for instance in wartime or after an oil price shock). The pursuit of monetary stability also depends on a country’s general macroeconomic situation, for which government authorities are responsible through the setting of budgetary and income policies. ‘Financial stability’, on the other hand, implies the absence both of signiﬁcant movements in the price of ﬁnancial assets and of crises impairing the solvency of institutions operating on the banking and ﬁnancial intermediation markets (or, put diﬀerently, that aﬀect the nominal value of the assets entrusted to these intermediaries by their clients). The movements and crises that the authorities are expected to prevent are those that have signiﬁcance for the stability of the ﬁnancial system...
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