Staying upright

The idea of “leaning against the wind” – acting earlier to prevent asset price bubbles – has become fashionable among central bankers as they consider how to conduct policy in a post-crisis world. But Lorenzo Bini Smaghi, the Italian on the European Central Bank’s executive board, has come out as a sceptic. “I personally think that a case has not yet been made for such a course of action,” he said in a speech this afternoon in Freiburg, southern Germany.

Bini Smaghi’s main worry was that central bankers would have to follow two objectives – keeping inflation under control and ensuring financial market stability – with just one instrument, the main policy interest rate.

True, the ECB had used its liquidity operations extensively to calm financial markets but “evidently, other instruments are needed and they belong more to the realm of macro-prudential supervision,” he said. Even if central banks had such powers (and the ECB will in the future have a role in assessing “systemic risks” to the European financial system) they “should not be considered as a substitute for conducting a sound monetary policy unequivocally committed to the primary objective of price stability”.

Like other ECB policymakers have done, Bini Smaghi pointed out that the Frankfurt institution already monitors “financial imbalances” in its regular analysis of monetary and credit aggregates. My impression is that, even in the post-crisis world, the ECB’s way of thinking is not going to change very much.

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