Macroprudential policies or leaning against the wind? “Separable” versus “non-separable” views

There are two theories regarding polic ies to prevent financial imbalances ( overindebtedness , asset price bubbles): Either monetary policy focuses exclusively on its usual objectives (inflation), and financial stability is maintained thanks to macroprudential policies (bank balance sheet ratios, loan-to-value ratios). This has been termed the “separable” view, whereby specialised objectives are separated between monetary policy (inflation) and macroprudential policy (financial stability); 1 Or monetary policy should also prevent financial imbalances by gradually becoming more restrictive during expansions, otherwise known as “leaning against the wind”. This is the “non-separable” view: monetary policy should also help combat financial imbalances. 2 Central banks have habitually opted for the separable view and reject ed leaning against the wind. This has systematically led to crises, perhaps because macroprudential policies are insufficiently employed.