RTTNews - Monetary policy should avoid accelerating a bubble through creating unfounded expectations for the continuation of low interest rates, Governor of the Bank of Japan, Masaaki Shirakawa said on Saturday at a forum hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. Monetary policy alone cannot or should not stave off a bubble.
Shirakawa assessed that unfounded expectations for the continuation of low interest rates were responsible for creating perverse incentive under benign economic conditions, the text of speech released by the central bank showed on Monday. This perverse incentives induced the process of accumulation and manifestation of financial imbalances which in turn destabilized the economy in the longer term.
A macroprudential perspective is definitely needed in assessing risks and in designing regulations, he added.
In order to understand the phenomenon of the global credit bubble, gross capital flows are far more important than net capital flows, Shirakawa noted. The gross capital flows do not necessarily indicate savings-investment balances at a national or regional level. Further, he said it was euro area banks that strikingly expanded cross-border lending, while the euro area as a whole did not register a current account surplus.
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