The Microeconomic Dimension of Monetary Policy

Abstract

This paper which touches on the links between the macroeconomic and microeconomic dimensions of monetary management, argues that bank soundness is a sine quo non of price stability (or exchange rate stability), and vice versa. It then describes the structural weaknesses of a banking system that create conditions for a financial crisis. The paper concludes by describing how official oversight can buttress market discipline, given some externalities inherent in the banking industry and the public goods nature of banking soundness.