Leverage and Monetary Policy - speech by David Miles

In a speech at the 13th annual conference of The Economic and Social Research Institute and the Foundation for Fiscal Studies in Dublin, David Miles - an external member of the Bank of England's Monetary Policy Committee (MPC) - addresses two issues: first, whether the financial crisis and the recession it caused show that setting monetary policy by reference to an inflation target is flawed; second, how to address the immediate monetary policy dilemma in the UK in the aftermath of the crisis. While his comments focus on the UK, they also have relevance for Ireland and beyond.
Published on 12 October 2010

Using monetary policy to reduce variability in asset prices is not likely to be effective. He says that "sharp asset price variability, per se, is not the most serious problem. It is the combination of (and the interaction between) high debt - or leverage - and variability in asset prices that is problematic.. I believe that an important way to help preserve financial stability is to have policy instruments directed at debt gearing (or leverage) and to be used in the light of what has happened to asset values. The aim would be to avoid a situation where gearing has gone up a lot alongside asset values so that subsequent falls in those values threaten the solvency of institutions and of individuals."

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