IMF Says Regulation Beats Monetary Policy in Warding Off Bubbles

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The case for using monetary policy to ward off asset-price bubbles is limited, the International Monetary Fund said in a report published days after the Federal Reserve opted to maintain an era of ultracheap credit.

The IMF’s research found that in the fight against financial instability, macroprudential policies like regulation ” can target imbalances and market imperfections much closer to their source than monetary policy does.”

Central banks in the world’s major economies have pursued loose monetary policy for years, prompting fears that cheap credit could cause financial imbalances. In the low-interest-rate environment, a number of developed economies have seen sharp rises in asset prices, for instance in property markets in Sweden, the U.K. and Australia.

The IMF research comes amid a debate over the merits of central banks “leaning against the wind” and setting interest rates higher during a boom to curb rising asset prices—effectively pursing a financial stability mandate alongside their traditional price stability mandate.

However, the IMF said that “with substantial slack in the macroeconomy, transmission from interest rates to financial risks seems weak, costs often appear greater than benefits, and implementation hurdles are substantial.”

It called on policy makers to implement “well-targeted prudential policies” instead, including regulation and supervision to address financial risks.

Both the IMF and the World Bank have warned the Fed against raising interest rates prematurely. The IMF has repeatedly said the U.S. central bank should delay a rate increase until 2016, not only because the U.S. economy isn’t ready, but also because of the global implications.

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