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Is monetary policy overburdened?

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  • Orphanides, Athanasios

    ()
    (Massachusetts Institute of Technology)

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 to preserve price stability and contribute to crisis management.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Public Policy Discussion Paper with number 13-8.

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Length: 31 pages
Date of creation: 25 Aug 2013
Date of revision:
Handle: RePEc:fip:fedbpp:13-8

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  1. 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, edition 1, volume 1, number 9929.
  2. William Roberds & Stephen Quinn, 2005. "The Big Problem of Large Bills: The Bank of Amsterdam and the Origins of Central Banking," 2005 Meeting Papers 318, Society for Economic Dynamics.
  3. Ben S. Bernanke, 1994. "The Macroeconomics of the Great Depression: A Comparative Approach," NBER Working Papers 4814, National Bureau of Economic Research, Inc.
  4. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc.
  5. Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA.
  6. Claudio Borio & Frank Piti Disyatat & Mikael Juselius, 2013. "Rethinking potential output: Embedding information about the financial cycle," BIS Working Papers 404, Bank for International Settlements.
  7. Alan Greenspan, 2004. "Risk and Uncertainty in Monetary Policy," American Economic Review, American Economic Association, vol. 94(2), pages 33-40, May.
  8. 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, January.
  9. Svensson, Lars E O, 2013. "Some Lessons from Six Years of Practical Inflation Targeting," CEPR Discussion Papers 9756, C.E.P.R. Discussion Papers.
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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, number wp06.
  2. Issing, Otmar, 2014. "Forward guidance: A new challenge for central banks," SAFE White Paper Series 16, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

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