Inflation targeting is gaining popularity as a framework for conducting monetary policy. At the same time many countries employ some sort of foreign exchange intervention policy assuming that these two policies can coexist. This paper attempts to show that both policies are not sustainable. Israel is a classic test case. We test our hypothesis using information from the financial markets. The results support the hypothesis that both policies cannot be sustained in the long run. The conclusion is that a credible monetary policy aimed at inflation targets should be conducted in a free floating exchange rate regime.

In June 2014, the International Risk Management Conference (IRMC) held its 7th edition in the Warsaw School of Economics (Warsaw, Poland). The theme of the conference was “The Safety of the Financial System: From Idiosyncratic to Systemic Risk.” Thirty-three papers were submitted for review for publication in this special issue of the Review of Finance. The papers have been subjected to the same rigorous referring process as other papers submitted to the Journal. Three papers were accepted. One (Fiordilisi and Ricci, 2016) was published in the last issue (Review of Finance 20(6), 2321–2347) and the other two are published here. The first two papers deal with systemic and policy aspects of the financial system while the third deals with an important segment of the financial markets, defaulted bonds. The paper by Oet, Ong and Lyytinen “aims to determine whether policymakers’ discussions of financial stability and other factors systematically explain deviations of observed policy rates from the Taylor-rule-implied rates.” They have two main findings: first, they find that discussion themes obtained from Federal Open Market Committee meeting minutes provide explanatory power beyond standard Taylor rule variables. Second, the tri-mandate policy rule provides additional explanatory power that accounts for changes in the economic and financial system. They conclude that the tri-mandate policy model with financial stability dominates Taylor-type rules in zero lower bound conditions.