Monetary policy is the policy laid down by the central bank, involving management of money supply and interest rates and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity (The Economic Times, 2017). One of the main lessons of the crisis is that central banks cannot simply neglect asset price developments on the tacit understanding that no matter how large and unsustainable price trends might become, they will be able to intervene in the aftermath of a crash to sweep up the pieces. The crisis has shown how costly this understanding can be in terms of, first, distorting the incentives of asset market participants in the boom phase and, second, tolerating the build-up of financial imbalances that can grow so large that their eventual unwinding is close to impossible to tackle with the conventional tools of monetary policy after a crisis.

Before the 2008 financial crisis, the common view was that a central bank should not react to asset price movements, except to the extent that they affect forecasts for inflation and the output gap (Munoz and Schmidt-Hebbel, 2012). They would instead stand ready to respond if and when a collapse in the prices of some assets threatened its ability to meet its policy mandates. In the aftermath of the crisis, there are increasing calls for central banks to be more proactive in responding to signs that an asset bubble may have emerged. This notion is often described as an imperative to “lean against the wind”, meaning that the central bank should act to lower asset prices that, by historical standards, seem unusually high (Gourio, Kashyap and Sim, 2017).

To contribute to financial stability, the first idea is that monetary policy should attempt to directly control financial booms that may lead to a crisis. Given the relationship between relevant interest rates and asset prices, advocators of this strategy argue that central banks can raise their policy interest rate to prick asset bubbles (De Grauwe, Mayer and Lannoo, 2008). To do this, central banks need a sufficiently broad and reliable strategic framework that can analyse and detect risks to price stability in a timely fashion. This strategic framework should include indicators that can signal macroeconomic and financial imbalances when they are forming. For example, when an unsustainable asset boom is inflating, fuelled by excess credit creation, the strategic framework should encourage the central bank to “lean against the wind” of financial exuberance. By doing this, the central bank would be implementing a more restrictive monetary policy stance than one they would implement in less perturbed financial conditions.

In this respect, there is also a conviction growing within the central bankin