International Monetary   Fund’s board has said that Central Banks of member countries should focus on monetary policy in pursuit of price stability which is the major function of Central Banks across the world stating that, institutional arrangements would need to be put in place to ensure that the role of central banks in the design and application of macro-prudential measures does not impinge on their ability to deliver price stability, which may require further thinking on appropriate governance frameworks.

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For instance, the policy roles of the central bank, the government, and other entities would need to be clearly delineated in the wake of their broadened scope of intervention during the crisis.

This it said has become necessary as one of the lessons to be drawn from the global financial melt down.
The IMF board of director which met recently to discuss lessons from the global melt down stated “Directors also broadly agreed that price stability should remain the primary objective of monetary policy, and emphasized the importance of preserving central banks’ hard-won credibility, which has been critical in anchoring inflation expectations.

They noted, however, that increasing efforts should be made to monitor and assess systemic financial developments and risks. Such analysis can be better integrated into the formulation and implementation of monetary policy, and there may be limited scope to use interest rate policy to “lean against the wind.” “In this regard, careful attention needs to be paid to the impact on credibility and accountability of bringing financial stability considerations into the policy framework.

“Directors noted that experience so far suggests that some good practices have been acquired for unconventional central bank measures. The effectiveness of these measures is enhanced by an explicit objective, clearly explained transmission, transparency and protected central bank balance sheets.
IMF’s Executive board it was learnt examined the Global financial crisis and came up with what it described as useful lessons for policy makers and central banks across the globe.

According to the IMF “The board on June 18, discussed the lessons from the crisis for central banks specifically. According to the report “Policymakers are beginning to incorporate the lessons of the crisis for policy frameworks, including those for systemic financial stability, prudential regulation and supervision, monetary policy, liquidity management, and crisis management.

According to the Executive board of the IMF, Central banks were  the main institutional focus of the discussion, although there were also implications for regulators separate from central banks. While the discussion considered mainly the issues facing advanced economies, the lessons are applicable to a wide range of economies.

The board it was learnt welcomed the opportunity to reflect on lessons for central banks drawn from the crisis and on important questions regarding the relationship between monetary policy and macro-prudential issues. Directors of the IMF it was gathered had a wide-ranging discussion on these important issues and broadly agreed with staff’s analysis and conclusions, while noting that there are still significant gaps in knowledge in some areas.

The IMF agreed that “drawing from the global financial melt down financial stability should be primarily addressed using a macro-prudential framework that integrates macroeconomic and systemic financial considerations and builds on micro-prudential supervision. They noted that the effective use of tools such as capital requirements and buffers, forward-looking loss provisioning, liquidity ratios, and prudent collateral valuation, could reduce systemic risk by mitigating procyclicality and the build-up of structural vulnerabilities”. Directors considered that the “macro-prudential framework should be based on robust rules, although rules would generally need to be complemented by judgment, particularly in view of the limited experience thus far with macro-prudential policies”.

They also noted that the “macro-prudential regulatory perimeter would need to encompass all potentially systemic financial institutions”.

Directors it was further gathered generally agreed that central banks should play an important role in “macro-prudential policies, regardless of whether they serve as the main financial regulator”. They noted that “considerable work remains to operationalise macro-prudential frameworks”.

They encouraged “further progress in this area and also on institutional arrangements to ensure that macro-prudential policies flow from a clear mandate with strong governance and accountability”.

Directors it was learnt “considered that central bank liquidity and crisis management can be refined to enhance flexibility to deal with episodes of stress, although there is no single best approach”. They noted that “institutions and markets that are potential recipients of liquidity support in times of stress should be monitored and regulated”. It was also learnt that IMF Directors agreed that “a continued and sustained effort to improve payment and settlement systems and crisis management coordination is warranted”.

Directors it was learnt “emphasized that preserving price stability and central banks’ monetary policy independence should be a key ingredient of reform efforts.

Directors noted that central banks and other public sector entities are enhancing the role of systemic financial stability in their policy frameworks.

They encouraged close collaboration with other international bodies and country authorities in these efforts, including by helping develop the needed analytical tools, fill key data gaps, and disseminate information and lessons learned from the crisis.