Should monetary policy be used to target financial stability?
Trying to ensure financial stability – which is hard to define, let alone measure – through its monetary policy would distract the RBI from its primary objective: fighting inflation
The recent turmoil in US financial markets, triggered by the collapse of Silicon Valley Bank, has raised questions about the impact of the Fed’s monetary policy on the stability of the banking system. More generally, it has brought back to the fore a fundamental question that central banks all over the world have been grappling with for a while now: should financial stability be given priority over inflation in the conduct of monetary policy? There is no easy answer to this as both are serious problems.