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Financial Stability, Monetarism and the Wicksell Connection

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In today's discussions of central banking, maintaining macro-financial stability has only recently appeared along-side the pursuit of low inflation as an important policy goal. This is in strong contrast to the earlier literature, where financial stability was often the main concern of the theory of central banking. This theme is explored here first from the point of view of the monetarist tradition, which treated an excess demand for money which the central bank in its capacity as lender of last resort had an obligation to relieve as a central feature of financial crises; and then from that of a later Wicksellian tradition, where co-ordination failures in the inter-temporal allocation of resources that it was monetary policy's task to avoid, were emphasized. Though there are no long-lost sure cures for financial instability awaiting discovery in the older literature, its emphasis on the potential for markets to fail to clear provides a helpful perspective on the phenomenon, often missing from modern models of the conduct of monetary policy.

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Paper provided by University of Western Ontario, Economic Policy Research Institute in its series University of Western Ontario, Economic Policy Research Institute Working Papers with number 20073.

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Date of creation: 2007
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Handle: RePEc:uwo:epuwoc:20073

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Postal: Economic Policy Research Institute, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/research/research_papers/epri_workingpapers.html

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Keywords: financial stability; financial instability; crises; co-ordination failure; lender of last resort; inflation; monetarism; forced saving; Wicksell;

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Cited by:
  1. Juan Pablo Zárate Perdomo & Adolfo Léon Cobo Serna & Jose Eduardo Gómez González, 2012. "Lecciones de las crisis financieras recientes para el diseño e implementación de las políticas monetaria y financiera en Colombia," Borradores de Economia 708, Banco de la Republica de Colombia.
  2. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
  3. Howitt, Peter, 2012. "What have central bankers learned from modern macroeconomic theory?," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 11-22.
  4. Sheetal K. Chand, 2012. "The Relevance of Haavelmo's Macroeconomic Theorizing for Contemporary Macro Policy Making," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 37, pages 3.
  5. Ronny Mazzocchi, 2013. "Scope and Flaws of the New Neoclassical Synthesis," DEM Discussion Papers 2013/13, Department of Economics and Management.
  6. William R. White, 2013. "Is Monetary Policy a Science? The Interaction of Theory and Practice over the Last 50 Years," SUERF 50th Anniversary Volume Chapters, SUERF - The European Money and Finance Forum.

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