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Prudential policy and financial dominance: exploring the link

Author

Listed:
  • Frederic Boissay
  • Claudio Borio
  • Cristina Leonte
  • Ilhyock Shim

Abstract

Since mid–2021, central banks have rapidly tightened monetary policy against the backdrop of historically high debt levels and a strong increase in inflation. Experience over the past five decades reveals that, under broadly similar circumstances, monetary policy tightening could usher in financial stress. We find that prudential policy tightening, whether before or during monetary tightening, helps to avoid such stress. Tighter prudential policy therefore reduces the risk of financial dominance and provides central banks with more policy headroom to fight inflation.

Suggested Citation

  • Frederic Boissay & Claudio Borio & Cristina Leonte & Ilhyock Shim, 2023. "Prudential policy and financial dominance: exploring the link," BIS Quarterly Review, Bank for International Settlements, March.
    • Handle: RePEc:bis:bisqtr:2303e
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    References listed on IDEAS

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    Cited by:

    1. Frederic Boissay & Fabrice Collard & Cristina Manea & Adam Hale Shapiro, 2023. "Monetary Tightening, Inflation Drivers and Financial Stress," Working Paper Series 2023-38, Federal Reserve Bank of San Francisco.
    2. Aurélien Espic & Lisa Kerdelhué & Julien Matheron, 2024. "Capital Requirements in Light of Monetary Tightening," Working papers 947, Banque de France.
    3. Dubravko Mihaljek, 2023. "Inflation and public finances: an overview," Public Sector Economics, Institute of Public Finance, vol. 47(4), pages 413-430.
    4. Hempell, Hannah S. & Silva, Fatima & Scalone, Valerio & Cornacchia, Wanda & Di Virgilio, Domenica & Palligkinis, Spyros & Velez, Anatoli Segura & Borkó, Tamás & Espic, Aurélien & Garcia, Salomón & Hei, 2024. "Implications of higher inflation and interest rates for macroprudential policy stance," Occasional Paper Series 358, European Central Bank.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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