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Monetary Policy Lessons from the Crisis

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  • Athanasios Orphanides

    ()
    (Central Bank of Cyprus)

Abstract

This paper provides a policymaker's perspective on some lessons from the recent financial crisis. It focuses on questions in three areas. First, what lessons can be drawn regarding the institutional framework for monetary policy? Has the experience changed the pre-crisis consensus that monetary policy is best performed by an independent central bank focused on achieving and maintaining price stability? Second, what lessons can be drawn regarding the monetary policy strategy that should be followed by a central bank? How activist should a central bank be in dampening macroeconomic fluctuations? Should the "output gap" serve as an important policy guide? Are there lessons regarding the stability-oriented approach followed by the ECB? How activist should a central bank be in tackling perceived asset price misalignments? Does the ECB's monetary analysis pillar help incorporate the pertinent information in formulating policy? Third, is monetary policy pursuing price stability enough to ensure overall stability in the economy? Or is there room for improvement regarding how central banks can contribute to financial stability? Should the role of monetary policy be seen as completely separate from the broader istitutional environment governing financial markets and institutions in our economy? Or would greater central bank involvement in regulation and supervision pertaining to credit and finance allow better management of overall economic stability?

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File URL: http://www.centralbank.gov.cy/media/pdf/NPWPE__No1_052010__.pdf
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Bibliographic Info

Paper provided by Central Bank of Cyprus in its series Working Papers with number 2010-1.

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Length: 43 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:cyb:wpaper:2010-1

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Web page: http://www.centralbank.gov.cy/nqcontent.cfm?a_id=1
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Related research

Keywords: Great ¯nancial crisis; activist stabilisation policy; real-time output gap; robust simple rules; stability-oriented monetary policy; asset prices; macro-prudential supervision; financial stability; ECB.;

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References

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  1. Beck, Günter & Wieland, Volker, 2007. "Money in Monetary Policy Design: A Formal Characterization of ECB-Style Cross-Checking," CEPR Discussion Papers 6097, C.E.P.R. Discussion Papers.
  2. Orphanides, Athanasios & Williams, John C., 2005. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1927-1950, November.
  3. Vasco Curdia & Michael Woodford, 2010. "The Central-Bank Balance Sheet as an Instrument of Monetary Policy," NBER Working Papers 16208, National Bureau of Economic Research, Inc.
  4. John B. Taylor & John C. Williams, 2010. "Simple and Robust Rules for Monetary Policy," NBER Working Papers 15908, National Bureau of Economic Research, Inc.
  5. Athanasios Orphanides & John C. Williams, 2008. "Learning, expectations formation and the pitfalls of optimal control monetary policy," Working Paper Series 2008-05, Federal Reserve Bank of San Francisco.
  6. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  7. Guenter Beck & Volker Wieland, 2008. "Central bank misperceptions and the role of money in interest rate rules," Working Paper Research 147, National Bank of Belgium.
  8. Thomas Laubach and John C. Williams, 2001. "Measuring the Natural Rate of Interest," Computing in Economics and Finance 2001 35, Society for Computational Economics.
  9. Orphanides, Athanasios & Williams, John C, 2010. "Monetary Policy Mistakes and the Evolution of Inflation Expectations," CEPR Discussion Papers 7892, C.E.P.R. Discussion Papers.
  10. Todd E. Clark & Sharon Kozicki, 2004. "Estimating equilibrium real interest rates in real time," Research Working Paper RWP 04-08, Federal Reserve Bank of Kansas City.
  11. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
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  14. Stanley Fischer & Franco Modigliani, 1978. "Towards An Understanding of the Real Effects and Costs of Inflation," NBER Working Papers 0303, National Bureau of Economic Research, Inc.
  15. Clouse James & Henderson Dale & Orphanides Athanasios & Small David H. & Tinsley P.A., 2003. "Monetary Policy When the Nominal Short-Term Interest Rate is Zero," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-65, September.
  16. 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.
  17. Franco Modigliani & Lucas Papademos, 1975. "Targets for Monetary Policy in the Coming Year," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 141-166.
  18. Athanasios Orphanides & John C. Williams, 2003. "Robust monetary policy rules with unknown natural rates," Finance and Economics Discussion Series 2003-11, Board of Governors of the Federal Reserve System (U.S.).
  19. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  20. Lars E.O. Svensson, 2002. "Inflation Targeting: Should It Be Modeled as an Instrument Rule or a Targeting Rule?," NBER Working Papers 8925, National Bureau of Economic Research, Inc.
  21. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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  23. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 5-41, January.
  24. William R. White, 2006. "Is price stability enough?," BIS Working Papers 205, Bank for International Settlements.
  25. Yates, Tony, 2002. "Monetary policy and the zero bound to interest rates: a review," Working Paper Series 0190, European Central Bank.
  26. Franco Modigliani & Lucas Papademos, 1978. "Optimal demand policies against stagflation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 114(4), pages 736-782, December.
  27. Donald L. Kohn, 2009. "Monetary Policy and Asset Prices Revisited," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 31-44, Winter.
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Cited by:
  1. Dalla Pellegrina, L. & Masciandaro, D. & Pansini, R.V., 2013. "The central banker as prudential supervisor: Does independence matter?," Journal of Financial Stability, Elsevier, vol. 9(3), pages 415-427.
  2. Jef Boeckx, 2011. "Estimating monetary policy reaction functions : A discrete choice approach," Working Paper Research 210, National Bank of Belgium.
  3. Carlos Capistrán & Gabriel Cuadra & Manuel Ramos Francia, 2011. "Policy Response to External Shocks: Lessons from the Crisis," Working Papers 2011-14, Banco de México.
  4. Sznajderska, Anna, 2014. "Asymmetric effects in the Polish monetary policy rule," Economic Modelling, Elsevier, vol. 36(C), pages 547-556.
  5. Tsvetomira Tsenova, 2013. "International Monetary Transmission with Bank Heterogeneity and Default Risk," FIW Working Paper series 110, FIW.

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