Monetary policy andfinancial stability: Should central bank leanagainst the wind?

Özet

After the globalfinancial crisis, it was observed that price stability alone would not ensurefinancialstability. The new paradigm indeed insists on the inclusion offinancial stability as an additional mac-roeconomic objective. In this context, it is essential to understand how exactly is the new objective offinancial stability will be placed in the existing framework. Also, the efficacy of monetary policy in thisregard needs to be thoroughly discussed. This paper probes into the employability of monetary policy asa tool to achievefinancial stability. We, therefore, compare between interest rates obtained from thestandard Taylor rule and asset price augmented Taylor rule in the Indian context. The results suggest thattargeting asset prices can be one of the effective ways to containfinancial instabilities and consequenteconomic slumps.