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Lessons for monetary policy: what should the consensus be?

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  • Otmar Issing
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    Abstract

    This paper outlines important lessons for monetary policy. In particular, the role of inflation targeting, which was much acclaimed prior to the financial crisis and since then has not lost much of its endorsement, is critically reviewed. Ignoring the relation between monetary policy and asset prices, as is the case in this monetary policy approach, can lead to financial instability. In contrast, giving, inter alia, monetary factors a role in central banks' policy decisions, as is done in the ECB's encompassing approach, helps prevent these potentially harmful side effects and thus allows for fostering financial stability. Finally, this paper makes a case against increasing the central banks' inflation target.

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    File URL: http://www.dallasfed.org/assets/documents/institute/wpapers/2011/0081.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 81.

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    Date of creation: 2011
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    Handle: RePEc:fip:feddgw:81

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    Keywords: Financial markets ; Monetary policy ; Banks and banking; Central;

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    Cited by:
    1. Roseline Nyakerario Misati & Esman Morekwa Nyamongo & Lucas Kamau Njoroge & Sheila Kaminchia, 2012. "Feasibility of inflation targeting in an emerging market: evidence from Kenya," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(2), pages 146-159, June.
    2. Issing, Otmar & Wieland, Volker, 2012. "Monetary theory and monetary policy: Reflections on the development over the last 150 years," CFS Working Paper Series 2012/20, Center for Financial Studies (CFS).
    3. Ravn, Søren Hove, 2014. "Asymmetric monetary policy towards the stock market: A DSGE approach," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 24-41.

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