Central Bank Role in Financial Stability

In the run – up to the 2007-2009 financial crises, Central Banks were celebrating their success on price stability amid their independence from government and virtues of their strong analytical framework of inflation targeting. However, the global financial crises paved the way to pounder about the financial stability sine qua non. Since history teaches us that Central Banks have always had a dual role: maintaining price stability and financial stability per se. In this context, the financial stability departments are expanding in different Central Banks of the world. It is worth to note that most Central Banks were established during the times of crises to finance the government and assume the role of financial crises management, in their early days. But at present, while the structures for financial stability are well articulated, somehow, the analytical models and the appropriate macro prudential tools to correct the financial system in times of crises are not developed, which are major challenges for the Central Banks to be applied de Jure. Thus many academic economists favor a rule-based system to ensure that the macro prudential tools are viable and efficient in time, while most Central Banks interested in discretion because according to them each situation is unique, quid pro qua.