The Role of Financial Stability Considerations in Monetary Policy and the Interaction with Macroprudential Policy in the Euro Area

142 Pages Posted: 23 Sep 2021 Last revised: 18 Nov 2021

See all articles by Ugo Albertazzi

Ugo Albertazzi

ECB -DG Monetary Policy

Emmanuelle Assouan

Banque de France

Oreste Tristani

European Central Bank (ECB)

Gabriele Galati

De Nederlandsche Bank

Thomas Vlassopoulos

European Central Bank (ECB)

Petra Adolf

Deutsche Bundesbank - Economics Department

Christoffer Kok

European Central Bank (ECB)

Carlo Altavilla

European Central Bank (ECB)

Claus Brand

European Central Bank (ECB)

Alberto Musso

European Central Bank (ECB)

Matthieu Bussière

Banque de France

Kalin Nikolov

European Central Bank (ECB)

Stephan Fahr

European Central Bank

Matic Patriček

Bank of Slovenia

Florian Heider

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Maria Rodriguez-Moreno

University of Navarra - Department of Microbiology and Infectious Diseases; Banco de España

Julien Idier

Banque de France - Centre de Recherche; European Central Bank (ECB)

Federico Maria Signoretti

Bank of Italy

Jorge Aban

Banco de España

Ulrike Busch

Deutsche Bundesbank

Alan Cassar

Central Bank of Malta

Hiona Balfoussia

Bank of Greece

Dimitrios Chalamandaris

Bank of Greece

Guido Bonatti

European Central Bank (ECB)

Diana Bonfim

Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Miguel Bouchinha

European Central Bank (ECB)

Matteo Falagiarda

European Central Bank (ECB)

Angela Maddaloni

European Central Bank (ECB)

Falk Mazelis

European Central Bank (ECB)

Felix Geiger

Deutsche Bundesbank

Pavo Miettinen

Bank of Finland

Anton Nakov

European Central Bank (ECB); CEPR

Goran Obradovic

Bank of Slovenia

Pelin Ibas

National Bank of Belgium

Maria Papageorghiou

Central Bank of Cyprus

Armands Pogulis

Latvijas Banka

Jansen David Jan

De Nederlandsche Bank

Vanessa Redak

Oesterreichische Nationalbank (OeNB)

Mario Jovanovic

Deutsche Bundesbank

Anatoli Segura Velez

Bank of Italy

Jan Kakes

De Nederlandsche Bank - Monetary and Economic Policy Department

Jens Tapking

European Central Bank (ECB)

Alina Kempf

European Central Bank (ECB)

Melanie Klein

Deutsche Bundesbank

Benjamin Weigert

University of Giessen - Department of Economics

Marek Licak

Bank of Slovenia

Date Written: September, 2021

Abstract

Since the European Central Bank’s (ECB’s) 2003 strategy review, the importance of macro-financial amplification channels for monetary policy has increasingly gained recognition. This paper takes stock of this evolution and discusses the desirability of further incremental enhancements in the role of financial stability considerations in the ECB’s monetary policy strategy. The paper starts with the premise that macroprudential policy, along with microprudential supervision, is the first line of defence against the build-up of financial imbalances. It also recognises that the pursuit of price stability through monetary policy, and of financial stability through macroprudential policy, are to a large extent complementary. Nevertheless, macroprudential policy may not be able to ensure financial stability independently of monetary policy, because of spillovers originating from the common transmission channels through which the two policies produce their effects. For example, a low interest rate environment can create incentives to engage in more risk-taking, or can adversely impact the profitability of financial intermediaries and hence their capacity to absorb shocks. The paper argues that the existence of such spillovers creates a conceptual case for monetary policy to take financial stability considerations into account. It then goes on to discuss what this conclusion might imply in practice for the ECB. One option would be to exploit the flexible length of the medium-term horizon over which price stability is to be achieved. Longer deviations from price stability could occasionally be tolerated, if they resulted in materially lower risks for financial stability and, ultimately, for future price stability. ...

Keywords: financial frictions, Monetary policy, systemic risk

JEL Classification: E3, E44, G01, G21

Suggested Citation

Albertazzi, Ugo and Assouan, Emmanuelle and Tristani, Oreste and Galati, Gabriele and Vlassopoulos, Thomas and Adolf, Petra and Kok, Christoffer and Altavilla, Carlo and Brand, Claus and Musso, Alberto and Bussière, Matthieu and Nikolov, Kalin and Fahr, Stephan Alexander and Patriček, Matic and Heider, Florian and Rodriguez-Moreno, Maria and Idier, Julien and Signoretti, Federico Maria and Aban, Jorge and Busch, Ulrike and Cassar, Alan and Balfoussia, Hiona and Chalamandaris, Dimitrios and Bonatti, Guido and Bonfim, Diana and Bouchinha, Miguel and Falagiarda, Matteo and Maddaloni, Angela and Mazelis, Falk and Geiger, Felix and Miettinen, Pavo and Nakov, Anton A. and Obradovic, Goran and Ibas, Pelin and Papageorghiou, Maria and Pogulis, Armands and Jan, Jansen David and Redak, Vanessa and Jovanovic, Mario and Velez, Anatoli Segura and Kakes, Jan and Tapking, Jens and Kempf, Alina and Klein, Melanie and Weigert, Benjamin and Licak, Marek, The Role of Financial Stability Considerations in Monetary Policy and the Interaction with Macroprudential Policy in the Euro Area (September, 2021). ECB Occasional Paper No. 2021272, Available at SSRN: https://ssrn.com/abstract=3928293 or http://dx.doi.org/10.2139/ssrn.3928293

Ugo Albertazzi (Contact Author)

ECB -DG Monetary Policy ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Emmanuelle Assouan

Banque de France ( email )

Paris
France

Oreste Tristani

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

Gabriele Galati

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Thomas Vlassopoulos

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Petra Adolf

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

Christoffer Kok

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Carlo Altavilla

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Claus Brand

European Central Bank (ECB) ( email )

Eurotower
Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany
+0049 69 13440 (Phone)
+0044 69 1344 6000 (Fax)

Alberto Musso

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matthieu Bussière

Banque de France

Paris
France

Kalin Nikolov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Stephan Alexander Fahr

European Central Bank ( email )

Kaiserstr. 29
Frankfurt am Main, DE 60066
Germany

Matic Patriček

Bank of Slovenia ( email )

Slovenska cesta 35
Slovenija, 1505
Slovenia

Florian Heider

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

HOME PAGE: http://https://sites.google.com/site/florianheider2/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Maria Rodriguez-Moreno

University of Navarra - Department of Microbiology and Infectious Diseases ( email )

Pamplona
Spain

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Julien Idier

Banque de France - Centre de Recherche ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Federico Maria Signoretti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Jorge Aban

Banco de España

Alcala 50
Madrid 28014
Spain

Ulrike Busch

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

Alan Cassar

Central Bank of Malta ( email )

Valletta, 1060
Malta

Hiona Balfoussia

Bank of Greece ( email )

21 E. Venizelos Avenue
GR-10250 Athens
Greece

Dimitrios Chalamandaris

Bank of Greece

21 E. Venizelos Avenue
GR 102 50 Athens
Greece

Guido Bonatti

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Diana Bonfim

Banco de Portugal ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Miguel Bouchinha

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Matteo Falagiarda

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Angela Maddaloni

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Falk Mazelis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Felix Geiger

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Pavo Miettinen

Bank of Finland

P.O. Box 160
Helsinki 00101
Finland

Anton A. Nakov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

CEPR ( email )

London
United Kingdom

Goran Obradovic

Bank of Slovenia

Slovenska cesta 35
Slovenija, 1505
Slovenia

Pelin Ibas

National Bank of Belgium

Brussels, B-1000
Belgium

Maria Papageorghiou

Central Bank of Cyprus

80 Kennedy Ave
1076 Nicosia
Cyprus

Armands Pogulis

Latvijas Banka

Riga
Latvia

Jansen David Jan

De Nederlandsche Bank

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Vanessa Redak

Oesterreichische Nationalbank (OeNB)

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

Mario Jovanovic

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Anatoli Segura Velez

Bank of Italy

Via Nazionale 91
Rome, 00184
Italy

Jan Kakes

De Nederlandsche Bank - Monetary and Economic Policy Department ( email )

Westeinde 1
1017 ZN Amsterdam
Netherlands

Jens Tapking

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alina Kempf

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Melanie Klein

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Benjamin Weigert

University of Giessen - Department of Economics ( email )

Licher Str. 62
Giessen, Hessen D-35394
Germany

Marek Licak

Bank of Slovenia

Slovenska cesta 35
Slovenija, 1505
Slovenia

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