Defining and achieving financial stability

We discuss the thorny issue of how to define financial stability, and conclude that the best approach is to define the characteristics of an episode of financial instability, and to define financial stability as a state of affairs in which episodes of instability are unlikely to occur. We then discuss public policies to achieve financial stability, distinguishing between preventive and remedial measures, and explore the costs and benefits of such policies. We conclude with some comments on current issues in financial regulation, including Basel 2.