Thus interest rates should be raised to curb excessive credit growth even if inflation remains tame.

ECONOMIST: Economics focus

As sterilisation has become less effective, excessive credit growth is pushing up inflation and causing overinvestment in property, especially in China.

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Instead, they look more broadly at financial imbalances, particularly excessive growth in credit, which tends to signal problems ahead.

ECONOMIST: Yesterday's financial architecture needs refurbishing

Messrs Borio and Lowe argue that central banks need to pay more attention to excessive growth in credit even when inflation is subdued.

ECONOMIST: Yesterday's financial architecture needs refurbishing

After 20-plus years of excessive and easy credit driving growth, leading to numerous booms and busts, most economies currently are in much worse positions than they were, and the general response has been to do more of the same.

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This, he said, is one reason why they should keep a close eye on excessive growth in money or credit as well as on their inflation target.

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Raising the rate paid on reserve balances also discourages excessive growth in money or credit, because banks will not want to lend out their reserves at rates below what they can earn at the Fed.

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They can do this, Mr Cooper argues, by preventing excessive credit creation (which he defines as credit growth far ahead of economic growth).

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Large capital inflows have forced China's central bank to buy massive quantities of dollar reserves, which have spilled over into excessive growth in the money supply and credit.

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For instance, excessive regulation can stifle financial innovation, reduce the flow of credit to worthy firms and consumers, and impede economic growth.

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