The relationship between monetary and financial stability

Release date
Vol. 71. No. 2. June 2008
Leni Hunter
The Reserve Bank of New Zealand takes distinct actions in order to pursue its goals of monetary and financial stability. However, it is necessary to have coordination between actions taken towards each goal, as the achievement of each depends on the other – inappropriate monetary policy can threaten financial stability, and the maintenance of price stability requires a stable financial environment. Policy actions taken for both goals should be consistent and mutually reinforcing where possible. For example, in some circumstances monetary policy may be used to proactively counter potential asset bubbles, and the use of financial stability tools may lend support to monetary policy’s function of stabilizing the business cycle.