Should the central banks take pre-emptive strikes against bubbles?<\/p>\n
Howard Davies writes: It makes sense to vary banks\u2019 capital requirements according to the financial cycle. When credit expansion is rapid, it may be appropriate to increase banks\u2019 capital requirements as a hedge against the heightened risk of a subsequent contraction. This increase would be above what microprudential supervision \u2013 assessing the risks to individual institutions \u2013 might dictate. In this way, the new Basel rules allow for requiring banks to maintain a so-called countercyclical buffer of extra capital.<\/p>\n
But if the idea of the countercyclical buffer is now generally accepted, what of the \u201cnuclear option\u201d to prick a bubble: Is it justifiable to increase interest rates in response to a credit boom, even though the inflation rate might still be below target? And should central banks be given a specific financial-stability objective, separate from an inflation target? \u00a0Pricking Bubbles<\/a><\/strong><\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" Should the central banks take pre-emptive strikes against bubbles? Howard Davies writes: It makes sense to vary banks\u2019 capital requirements according to the financial cycle. When credit expansion is rapid, it may be appropriate to increase banks\u2019 capital requirements as … Continue reading ![\"Pricking](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2015\/10\/Pricking-Bubbles.jpg\")
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