Dr Mohan, in his speech on Some apparent puzzles for contemporary monetary policy delivered at a conference for discussing China and Indias changing economic structure: domestic and regional implications at Beijing recently, said that monetary policy is often considered as a tool to achieve financial stability, especially to counter threats from asset price misalignments.
Central banks need to take cognizance of emerging financial imbalances by lengthening their monetary policy horizons beyond the usual two-year framework, he added.
Further, he also stressed on the fact that central banks will have to contribute to financial stability more through prudential regulation and supervision to address the emergence of financial sector excesses or imbalances arising from excess liquidity or other economic imbalances.
He explained that transfer of supervisory responsibilities outside the central bank in several countries has also led central banks to focus their attention on systemic issues as reflected in a reorientation of organisational arrangements. Given the need for financial stability alongside monetary stability, central banks need to be cautious before joining the recent trend of separating the monetary and supervisory authorities, particularly in view of the muted responses to the pricing channels of monetary policy, he said.
Dr Mohan also said that traditional signals such as inflation, interest rates and exchange rates are today overly anchored while the global economy is on a long leash supported by easy finance.