Monetary policy and financial stability

In essence, monetary policy can only be effective if financial markets are fully integrated and function smoothly and efficiently.

Well-functioning financial markets are

  • a prerequisite for the effective transmission of monetary policy impulses to all members of a monetary union; and
  • an important channel for relaying these monetary policy impulses to businesses and households. Only then can monetary policy ensure price stability.

Conversely, financial instability may hamper a central bank’s capability to maintain price stability over the medium term. In a free market economy, it is primarily market participants that are responsible for achieving and maintaining financial stability. They are expected to adequately assess and control their risks and to bear the financial consequences of their business activities. This notwithstanding, financial stability is regarded as a “public good,” which calls for an institutional framework for securing financial stability and limiting the effects of instability.

Given the increasingly interlinked banking/financial system, global financial stability has become ever more important over the past decades, as a rising number of banks and financial institutions have been operating in more than one country.

For this reason, the Eurosystem also contributes to safeguarding the stability of the financial system.