Monetary Policy and Financial Stability: Evaluating the Role of Central Banks in Preventing Systemic Risks
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Abstract
Monetary policy plays a critical role in maintaining financial stability and preventing systemic risks within an economy. This paper evaluates the role of central banks in safeguarding financial stability through their monetary policy tools and regulatory measures. By examining the relationship between monetary policy and financial stability, the paper explores how central banks mitigate risks such as excessive leverage, asset bubbles, and liquidity crises. It also assesses the effectiveness of various monetary policy frameworks, including conventional interest rate policy, unconventional measures such as quantitative easing, and macroprudential tools. Additionally, the paper discusses the challenges and trade-offs faced by central banks in balancing their objectives of price stability and financial stability. Through a comprehensive analysis of central bank policies and practices, this paper provides insights into the evolving role of central banks in safeguarding the stability of the financial system amidst changing economic conditions and financial market dynamics.
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