Prior to the onset of the financial crisis in 2007, most policymakers traditionally assumed that price stability should be the prime objective of monetary policy, typically combining a medium-term inflation target with capacity utilisation objectives such as the highest attainable employment or output consistent with price stability.
Financial stability was considered to be an altogether different policy domain–and assuring it not monetary policy’s main purpose. Implicitly, it was generally believed that, if a central bank managed to keep inflation stable and slightly positive – typically at around 2% –, next to real economic,also financial stability would be assured.
The Great Recession has taught policymakers that price stability in and of itself is no guarantee of financial stability and cannot prevent financial crises. As it turns out, shocks to the financial system can have major repercussions for the real economy – and thus also in terms of risks to price stability. And so strengthened microprudential policies targeting individual institutions have been given their macroprudential counterparts, focusing explicitly on systemic risks to the financial system at large and its interactions with the real economy. It is with in this new framework that the ECB has been given macroprudential responsibilities to ensure financial stability as part of the single supervisory mechanism (SSM), while keeping its (macro)prudential objectives separate from its duty to ensure price stability.
