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On the Nexus of Monetary Policy and Financial Stability: Is the Financial System More Resilient?

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  • Patricia Palhau Mora
  • Michael Januska

Abstract

Monetary policy and financial stability are closely intertwined, and the resilience of the financial system carries weight in this relationship. This paper explores whether the financial system is more resilient as a result of the G20’s post-crisis agenda for financial regulatory reform. It summarizes the agenda’s key measures and implementation schedules, both internationally and in Canada, reviews the effectiveness of the reform measures in preventing and addressing financial imbalances, and outlines outstanding issues. It finds that, to date, there is evidence that the G20’s reform measures are increasing financial system resilience globally, especially in the banking sector. Yet, implementation is still ongoing, and it may be too early to judge how the reform measures are interacting with one another. In Canada, the resilience of the financial system is being enhanced by the ongoing implementation of more-rigorous global regulatory and supervisory standards. Consequently, the likelihood and impact of severe financial stress in the future should be reduced, supporting the primary focus of monetary policy on achieving its 2 per cent inflation target.

Suggested Citation

  • Patricia Palhau Mora & Michael Januska, 2016. "On the Nexus of Monetary Policy and Financial Stability: Is the Financial System More Resilient?," Discussion Papers 16-12, Bank of Canada.
    • Handle: RePEc:bca:bocadp:16-12
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    More about this item

    Keywords

    Financial stability; Financial system regulation and policies; Monetary policy framework;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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