(Epstein, 2003).

These principles have far reaching implications. Central bank independence implies, first and
foremost, that the central bank should not be subject to pressure from the government to finance
government activities (deficits). The focus on inflation means that the central bank should not
be concerned with other goals such as promoting full employment, supporting industrial policy
or allocating credit to sectors of special social need, such as housing. Neither should the central
bank attempt to manage exchange rates through monetary policy, and certainly not through
using controls on capital flows. The pursuit of indirect tools of monetary policy means that the
central bank should not use credit allocation techniques such as subsidized interest rates, credit
ceilings, and capital controls to affect either the quantity or the allocation of credit. These tenets
are being promoted not only in developed countries, but also with great vigor in the developing
world.

The global financial crisis showed that countries need to contain risks to the financial system
as a whole with dedicated financial policies. Many central banks that also have a mandate to
promote financial stability have upgraded their financial stability functions, including by
establishing macroprudential policy frameworks. Macroprudential policy needs a strong
institutional foundation to work effectively. Central banks are well placed to conduct
macroprudential policy because they have the capacity to analyse systemic risk. In addition,
they are often relatively independent and autonomous. In many countries, legislators have
assigned the macroprudential mandate to the central bank or to a dedicated committee within
the central bank. Regardless of the model used to implement macroprudential policy, the
institutional setup should be strong enough to counter opposition from the financial industry
and political pressures and to establish the legitimacy and accountability of macroprudential
policy. It needs to ensure that policymakers are given clear objectives and the necessary legal
powers, and to foster cooperation on the part of other supervisory and regulatory agencies (see
further Key Aspects of Macroprudential Policy). A dedicated policy process and is needed to
operationalize this new policy function, by mapping an analysis of systemic vulnerabilities into
macroprudential policy action (Staff Guidance Note on Macroprudential Policy).