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Is monetary policy overburdened?

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  • Athanasios Orphanides

Abstract

Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily fit in the realm of traditional monetary policy. This paper examines three broad public policy goals that may overburden monetary policy: full employment, fiscal sustainability and financial stability. While central banks have a crucial position in public policy, the appropriate policy mix also involves other institutions, and overreliance on monetary policy to achieve these goals is bound to disappoint. Central bank policies that facilitate postponement of needed policy actions by governments may also have longer-term adverse consequences that could outweigh more immediate benefits. Overburdening monetary policy may eventually diminish and compromise the independence and credibility of the central bank, thereby reducing its effectiveness in maintaining price stability and contributing to crisis management.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 435.

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Length: 39 pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:bis:biswps:435

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Keywords: Global financial crisis; monetary policy; real-time output gap; fiscal dominance; financial stability; central bank independence;

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  1. Bernanke, Ben S, 1995. "The Macroeconomics of the Great Depression: A Comparative Approach," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(1), pages 1-28, February.
  2. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(2), pages 97-116, Spring.
  3. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
  4. Alan Greenspan, 2004. "Risk and Uncertainty in Monetary Policy," American Economic Review, American Economic Association, American Economic Association, vol. 94(2), pages 33-40, May.
  5. Anat Admati & Martin Hellwig, 2013. "The Bankers' New Clothes: What's Wrong with Banking and What to Do about It," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 9929.
  6. Bernanke, Ben S. & Woodford, Michael (ed.), 2005. "The Inflation-Targeting Debate," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226044712, 01-2013.
  7. Stephen Quinn & William Roberds, 2005. "The big problem of large bills: the Bank of Amsterdam and the origins of central banking," Working Paper, Federal Reserve Bank of Atlanta 2005-16, Federal Reserve Bank of Atlanta.
  8. Svensson, Lars E O, 2013. "Some Lessons from Six Years of Practical Inflation Targeting," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9756, C.E.P.R. Discussion Papers.
  9. Claudio Borio & Frank Piti Disyatat & Mikael Juselius, 2013. "Rethinking potential output: Embedding information about the financial cycle," BIS Working Papers, Bank for International Settlements 404, Bank for International Settlements.
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Cited by:
  1. Dongkoo Chang & Choon-Seng Lim, Vincent & Eufrocinio M. Bernabe, Jr., 2014. "Alternative Monetary Policy Frameworks for Price and Financial Stability," Working Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, South East Asian Central Banks (SEACEN) Research and Training Centre, number wp06.
  2. Issing, Otmar, 2014. "Forward guidance: A new challenge for central banks," SAFE White Paper Series, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt 16, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

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