European Central Bank Executive Board member Peter Praet said there are limits to what the ECB can do to stem the sovereign debt crisis.
“There are limits to what monetary policy can and should credibly do: monetary authorities cannot be expected to solve problems which lie well outside their current official remit,” Praet said in a speech in Berlin today.
“A central bank should be aware that it is constantly required to exercise a delicate balancing act,” he said. “On one hand, it may need to provide backstops to remove tail risks that could otherwise result in severe downward pressure on price stability. On the other hand, by mitigating a crisis which largely reflects shortcomings in other policy areas and excesses in the financial sector, the central bank may alter incentives for different actors to correct imbalances.”
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