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The international financial crisis has showed that pure inflation targeting is inadvisable and the mandate of central banks should extend beyond just price stability, said Duvvuri Subbarao, Governor, Reserve Bank of India.
"We have seen that price stability does not necessarily ensure financial stability. Indeed there is an even stronger assertion - that there is a trade-off between price stability and financial stability and that the more successful a central bank is with price stability, the more likely it is to imperil financial stability," Subbarao said in a speech at the International Research Conference in Mumbai on Friday.
Talking on the role of central banks in preventing asset price bubbles, Subbarao said central banks have a role in preventing "bank centered" bubbles, but the instrument for this is not monetary policy but regulatory intervention. He added that central banks' efforts to check asset price bubbles demand not just analytical capability but mature judgment of the nature of the risk.
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