Abstract
Before the 2008 crisis, macroeconomic theory and central bank practice regarded low and stable inflation to be a policy objective that was sufficient to ensure macroeconomic and financial stability. There was little concern with the details of the financial system or balance sheet aggregates. This article makes the case that these details are important and that monetary and macroprudential policy must control both the quantity and allocation of credit. This entails a revision of conventional monetary theory as well as policy, particularly to explain the paradox of the precrisis situation of so much credit and so little inflation. The particular role of real estate investment is described as a source of financial instability that can only be addressed by nuanced monetary and macroprudential policy.
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