Rediscovering the Macroeconomic Roots of Financial Stability Policy: Journey, Challenges, and a Way Forward

The recent financial crisis has triggered a major rethink of analytical approaches and policy toward financial stability. The crisis has encouraged a sharper focus on systemic risk, the inclusion of a financial sector in macroeconomic models, a shift from a microprudential to a macroprudential orientation in regulation and supervision, and questions about whether price stability is a sufficient criterion to guide monetary policy. In the process, it has led to a rediscovery of the macroeconomic roots of financial instability. This review argues that this development is welcome but has not gone far enough. To substantiate this conclusion, the review documents this analytical and policy journey before suggesting a way forward.