From Monetary Stability to Financial Stability: Theoretical Linkages

Abstract

The relationship between monetary stability and financial stability has become a central issue in modern macroeconomic debates, especially since the global financial crisis. This paper examines the theoretical and historical linkages between these two dimensions of economic stability. The objective of the study is to analyze whether monetary stability is sufficient to ensure financial stability and how the relationship between the two has evolved over time. The paper adopts a qualitative and historical approach based on a review of major economic theories and historical episodes of financial instability. In particular, the analysis focuses on three key periods of financial history (1790–1933, 1980–1997, and the post-2000 period) to highlight how monetary regimes and financial structures have interacted. The results show that while monetary stability can contribute to financial stability, it is not sufficient on its own to prevent financial crises. Financial stability requires complementary regulatory and macroprudential frameworks. The main contribution of this paper lies in clarifying the theoretical linkages between monetary and financial stability and highlighting the need for an integrated policy framework combining monetary and financial regulation.