It is clear that a sound financial system is a prerequisite for an effective implementation of monetary policy. This is well illustrated by the global financial crisis of 2008-09. It is precisely this interconnectedness that, while price stability remains the main focus of central banks, increasingly they are also given the dual mandate to promote financial stability. This calls for central banks to rethink the current framework for monetary policy to include macro-prudential policies in order to fulfill these dual responsibilities. It is recognized, on theoretical and practical grounds, that although monetary policy is an integral component of the policy framework for financial stability, it has limitations. For example, the efficacy of monetary policy is questionable in an environment where consumer prices and asset prices move in opposite directions.
The escalating prominence of macro-financial linkages also implies that there is now a widespread recognition of the need to focus on procyclicality, systemic risk, and internal and external shocks to the overall economy. Clearly, the consequence of implementing macroprudential policies will have a direct bearing on the conduct of monetary policies and vice-versa. Thus, both sets of policies need to be manifested in a coherent and effective approach which can mutually reinforce and support each other to achieve both price and financial stability. Monetary and macro-prudential policies may be most successfully implemented in the presence of an overall policy framework that fosters their complementary management. There is a need to critically examine potential synergies, trade-offs, and conflicts between them. Apart from mutual consistency in implementing both monetary and macro-prudential policies domestically, there is also a need to examine cross-border collaboration in implementing both sets of policies.
It is against the above background that the SEACEN High-Level Seminar on Integrating Monetary Policies with Macro-Prudential Framework was held in Bali on 6-8 November 2013, hosted by Bank Indonesia. This publication is a selected collection of the papers presented and discussed in that Seminar.
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