Melnyk A. S., Lobanova V. V., Mykhailenko O. G.

Oles Honchar Dnipropetrovsk National University


In the aftermath of the financial crisis of 2008 and 2009 there has been a lively debate about what caused the crisis and how the risks of future crises can be reduced. There is also a lively debate about the future of monetary policy, whether it needs to be modified in the light of the crisis, and what its relation to financial stability should be.

The simplest way to address the exchange rate dominance problem would be to allow for greater exchange rate flexibility. Of course, this does not, and should not, rule out interventions to limit excessive exchange rate volatility [1].

After the beginning of the financial and economic crisis, the question of what central banks could contribute to financial stability became more important. In the previous years, the view had become established that monetary policy served financial stability best by focusing on price stability. This was linked to the widespread opinion that monetary policy should not “lean” against a growing bubble on the equity or real estate markets. It should wait until the bubble had burst before intervening and cleaning up. The “lean or clean” question was reassessed as a result of the financial crisis. The damage caused when a bubble bursts can be so enormous that it is not easily remedied using monetary policy instruments.

To simplify things somewhat, two ways in which central banks can attempt to make a more substantial contribution to financial stability can be distinguished. The first is to steer monetary policy decisions more strongly in the direction of financial stability. The argument against this is the danger of overburdening monetary policy. One lesson from the years of the Great Inflation was that the overall result is not improved when monetary policy tries to achieve too many goals simultaneously. The credibility and success of monetary policy will inevitably suffer as a result. For this reason, the second option has much in its favour. This is to supplement the central banks’ instruments in such a way that – alongside the maintenance of price stability – central banks can also make a greater contribution to financial stability than they have done in the past [2].

Given that bubbles are relevant to the extent that they may weaken the financial system, it is better to use regulatory and supervisory tools to target the source of problems. Moreover, the scope of a new central bank paradigm should be viewed with caution, especially if it implies the underestimation of the contribution of price stability to financial stability. Also, the risks associated with the unprecedented monetary measures undertaken by the central banks of developed nations to offset the consequences of the crisis include the threat of protectionism, something that should by all means be avoided [3].

The list of references:

1. Lars E O Svensson: Monetary policy after the crisis Speech by Mr Lars E O Svensson, Deputy Governor of the Sveriges Riksbank, at the conference “Asia’s role in the post-crisis global economy”, held at Federal Reserve Bank of San Francisco, 29 November 2011 [Web resource]. – Access mode: r111201a.pdf

2. Thomas Jordan: Monetary policy in the financial crisis – measures, effects, risks Speech by Mr Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank, at the Swiss Banking Global Symposium, Zurich, 16 November 2012 [Web resource]. – Access mode:

3. Financial Crises: Prevention, Correction, and Monetary Policy – Manuel Sánchez, Cato Journal [Web resource]. – Access mode: serials/files/cato-journal/2011/9/ cj31n3-7.pdf]

4. Monetary Impact Of A Banking Crisis and the Conduct of Monetary Policy – International Monetary Fund, 1997 [Web resource]. – Access mode: external/pubs/ft/wp/wp97124.pdf