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The Day after Tomorrow
the cyclical expansion of leverage, credit, asset prices, and risk taking. This means that there might be a role for balance sheet aggregates in the determination of monetary policy, echoing the once-popular targeting of monetary aggregates, although for reasons of financial stability rather than price stability. But from a practical point of view, little is known about the complexities that implementing such policy could involve; its likely effects; or the short-run tradeoffs it might impose among financial stability, price stability, and output stability, to the extent that these various objectives could demand policy changes in different directions. While the question of the appropriate role of monetary policy is being debated primarily in advanced countries, it is no less relevant for emerging markets, particularly those that adopted inflation-targeting regimes in recent years. One additional concern for them is that gearing the policy stance to correct hard-to-identify asset price misalignments may detract from its transparency and predictability, which may be especially worrisome for countries still at the early stage of establishing monetary policy credibility or, more generally, their commitment to price stability. It might also hamper the beneficial effects of financial development, which might be reflected in seemingly “excessive� credit growth. Aside from monetary policy, fiscal policy can also contribute to financial stability. The global crisis has brought under the spotlight the potential of countercyclical fiscal policy, and in particular the need to create room to maneuver through fiscal tightening in the boom, which helps mitigate its amplitude and generates buffers for a fiscal loosening in the downswing. Some emerging markets (for example, Chile) have benefited from strict adherence to this course of action, which allowed them to support aggregate demand in the crash and, in some cases, to finance the measures needed to shore up the financial system as well. Yet the crisis has also shown that the deployment of discretionary fiscal policy often faces considerable delays, which makes it unsuitable for counteracting the financial cycle in a timely manner more generally. This underscores the need to build up self-deploying automatic stabilizers, which are still weak in most developing countries (Debrun and Kapoor 2010). Apart from the countercyclical deployment of fiscal policy, other fiscal measures can still contribute to financial stability. Most important, the removal of widespread tax incentives to borrowing by the corporate sector, through the favorable tax treatment of debt relative to equity financing,