ting moral hazard. In light of the challenges involved, we can see that monetary policy may not be suited for directly abating bubbles, and should therefore be focused on the primary goal of pursuing price stability..

At the same time, central banks should not underestimate the potency of monetary policy. It is true that in most cases a small change in the policy rate may not be sufficient to slow down those asset price bubbles that develop on the false expectation of very large future capital gains. However, recent research suggests that there are other channels through which changes in interest rates can affect asset prices. The first is the profitability of financial institutions that systematically borrow short and lend long (Gourio, Kashyap and Sim, 2017). These leveraged institutions are credit companies that borrow by issuing short term liabilities and use the proceeds of their borrowing to lend over the longer term, or to purchase assets that have a longer maturity. They use their capital as a partial guarantee for their business, with a larger proportion of their lending being financed by borrowing. Confronted with even marginal increase in the short-term borrowing costs, due to the increase in the policy rate, these institutions are forced to to borrow less and pay back their previous debt because the thin margins from which they profit would become even thinner or negative (Gourio, Kashyap and Sim, 2017). In doing so, they would probably have to sell the assets that they had purchased on the expectations of future price gains. In the end, the deleveraging process triggered by the policy induced restriction would ultimately exert a dampening effect on asset price growth.

Regulatory Reforms

Regulation is a rule or directive made and maintained by an authority. In the financial sector, it is a truism that financial regulation usually evolves most in response to crises (Richardson, 2012). Considering credit rating agencies, which were central participants in the global financial crisis, as a first example of how regulatory actions and inaction helped trigger the crisis, mortgage companies routinely provided loans to borrowers with little ability to repay those debts because they earned fees for each loan and they could sell those loans to investment banks and other financial institutions. Investment banks and other financial institutions then gobbled up those mortgages beca