(a) Financial Stability and Central Bank Liquidity - Central Bank's Liquidity
Operations and Relevance to Ease Credit Conditions.

Financial stability has emerged as one of the key policy objectives of monetary policy authorities. To achieve this objective, central banks have very often resorted to large scale liquidity injections to cope up with episodes of heightened uncertainty amidst financial instability as witnessed during the current crisis. How best to achieve a balance - is something that both academics and policymakers will continue to ponder over for a long time. Although the provision of liquidity is undoubtedly a useful tool, it entails moral hazard problem by increasing incentives for banks to take on excessive risk. Hence, maintaining an appropriate balance and framing a suitable and effective framework for financial stability is a challenge for the central banks.