Monetary policy and financial stability in the euro area

Following the financial crisis, a new theoretical framework has emerged, in which monetary policy aims at price stability and macro-prudential policy aims at financial stability. In 2014, the European in-stitutions established the Single Supervisory Mechanism (SSM) to pursue the objective of financial sta-bility. The new institutional arrangement provides for micro-prudential policy under the direct control of the ECB and macro-prudential policy under the responsibility of NCAs and the supervision of the ECB. The essay presents a literature review and a simple analytical model to assess this new institu-tional design. Despite a still incomplete reform process, as the decision-making process lacks total transparency and the regulatory field is not levelled, the literature review supports the view that the SSM promotes financial stability in the Euro area. According to our model, we positively assess the new institutional framework: an increase in the efficiency of prudential policies to face financial risks allows the ECB to pursue the objective of financial stability without compromising the goal of output stability.