Too contested to avoid, too complex to normalise: the politics of integrating financial stability considerations into the ECB’s monetary policy

Whether and how to integrate financial stability considerations into monetary policy has been a long-standing challenge for central banks. The 2007–2009 global financial crisis disrupted the previously dominant ‘separation principle’, in which, congruent with the Tinbergen rule, monetary policymakers focused on price stability and delegated financial stability to regulation. Given the crisis’ devastating consequences for central bank legitimacy, this financial stability-monetary policy nexus arguably needed resolution. While the European Central Bank, this article’s focus, initially upheld the separation principle by promoting macroprudential policy as the solution, it has in 2021 shifted towards an ambiguous embrace of financial stability considerations in its monetary policy framework. Drawing on two prominent IPE approaches, we explain this shift through the interplay of epistemic developments and preference-based clashes within the ECB Governing Council over unconventional monetary policies. Concerned about large-scale asset purchases (QE), hawkish members contested these policies by pointing to their long-term financial stability risks. Their push – combined with improved macro-financial analysis and the perceived weakness of macroprudential policy – weakened the separation principle. Yet as epistemic challenges and internal disagreements about the complex trade-offs and complementarities between price stability and financial stability remained unresolved, an ambiguous compromise remained the only viable outcome.