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Can raising interest rates aid financial stability?

Mix of policies could more effectively prevent excessive risk-taking

Published on Jul 7, 2014 8:22 AM

BORROWERS have enjoyed an unprecedented period of low interest rates as global central banks try to spur spending and investment amid sluggish economic growth.

The move has largely worked, but not without costs. Ultra-low rates over the past five years have come at the expense of lenders and savers, who have suffered pitiful returns on their excess cash.

This has in turn encouraged some investors to take greater risks in search of higher yields, which market watchers warn may be sowing new seeds of instability just as the last recollections of the global financial crisis are fading.

Talk is rife of stock market bubbles - United States markets have been on a five-year bull run, culminating in record highs this year. Last Thursday, the Dow Jones Industrial Average crossed the 17,000 level for the first time.

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Background story

Rather than place the main burden on macroprudential policy to ensure financial stability, perhaps an interplay of both monetary and macroprudential policy could more effectively prevent excessive risk-taking.