Edited by Christopher J. Green, Eric J. Pentecost and Tom Weyman-Jones
Chapter 8: Rules for Money and Rules for Finance: A New Relationship After the Crisis?
Franco Bruni1 INTRODUCTION Weaknesses in financial regulation and supervision are usually indicated as the most important cause of the global financial crisis. They are particularly harmful as financial innovation creates complex and opaque financial instruments. David Llewellyn’s papers share this view, with which I agree as well.2,3 However, monetary policy has serious responsibilities in causing the crisis. The abandonment of monetary discipline resulted in too low interest rates for too much time, nourishing asset price bubbles and financial instability. The consensus analysis of the crisis is in agreement with this idea but, when discussions look at the remedies to avoid future crises, monetary policy issues are left aside while re-regulation monopolises the discourse. Proposals are put forward to organise new ‘macroprudential controls’, monitoring and checking systemic risks along the cycle and counteracting the pro-cyclicality of prudential regulations. Countercyclical macroprudential controls would work in parallel with monetary policies and could imply new responsibilities for central banks. The next section recalls that monetary policies are among the causes of the crisis and amplify regulatory failures. The third section considers the complementary roles of monetary and prudential measures in crisis management and in improving the long run stability of the financial system. The fourth section discusses the past and future of the relationship between monetary and prudential policies, leading to the concept of macroprudential controls, which is developed in the fifth section. The conclusion points at the issues to be addressed for optimising the role of central banks as systemic regulators. 118...
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