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Lessons for monetary policy: What should the consensus be?

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  • Issing, Otmar
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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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    Bibliographic Info

    Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2011/13.

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    Date of creation: 2011
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    Handle: RePEc:zbw:cfswop:201113

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    Related research

    Keywords: Inflation Targeting; Asset Prices; Financial Stability; ECB;

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    References

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    1. Issing,Otmar, 2008. "The Birth of the Euro," Cambridge Books, Cambridge University Press, number 9780521731867, October.
    2. Charles Goodhart, 2010. "The Changing Role of Central Banks," FMG Special Papers sp197, Financial Markets Group.
    3. Charles Goodhart, 2010. "The changing role of central banks," BIS Working Papers 326, Bank for International Settlements.
    4. Sousa, João & Zaghini, Andrea, 2004. "Monetary policy shocks in the euro area and global liquidity spillovers," Working Paper Series 0309, European Central Bank.
    5. 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.
    6. Vasco Cúrdia & Michael Woodford, 2009. "Credit spreads and monetary policy," Staff Reports 385, Federal Reserve Bank of New York.
    7. Issing,Otmar, 2008. "The Birth of the Euro," Cambridge Books, Cambridge University Press, number 9780521516730, October.
    8. 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.
    9. Hyun Song Shin & Kwanho Shin, 2011. "Procyclicality and Monetary Aggregates," NBER Working Papers 16836, National Bureau of Economic Research, Inc.
    10. Alan S. Blinder, 2010. "How Central Should the Central Bank Be?," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 123-133, March.
    11. Lars E O Svensson, 2005. "Monetary Policy with Judgment: Forecast Targeting," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    12. Alessi, Lucia & Detken, Carsten, 2009. "'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity," Working Paper Series 1039, European Central Bank.
    13. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
    14. Michael Scharnagl & Christina Gerberding & Franz Seitz, 2010. "Should Monetary Policy Respond to Money Growth? New Results for the Euro Area," International Finance, Wiley Blackwell, vol. 13(3), pages 409-441, Winter.
    15. Frederic S. Mishkin, 2007. "Will monetary policy become more of a science?," Finance and Economics Discussion Series 2007-44, Board of Governors of the Federal Reserve System (U.S.).
    16. Otmar Issing, 2009. "Asset Prices and Monetary Policy," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 45-51, Winter.
    17. Stephan Fahr & Roberto Motto & Massimo Rostagno & Frank Smets & Oreste Tristani, 2013. "A monetary policy strategy in good and bad times: lessons from the recent past," Economic Policy, CEPR & CES & MSH, vol. 28(74), pages 243-288, 04.
    18. Claudio E. V. Borio & Andrew Filardo, 2007. "Globalisation and inflation: New cross-country evidence on the global determinants of domestic inflation," BIS Working Papers 227, Bank for International Settlements.
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    Cited by:
    1. Ravn, Søren Hove, 2014. "Asymmetric monetary policy towards the stock market: A DSGE approach," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 24-41.
    2. Arto Kovanen, 2011. "Does Money Matter for Inflation in Ghana?," IMF Working Papers 11/274, International Monetary Fund.
    3. Otmar Issing & Volker Wieland, 2013. "Monetary Theory and Monetary Policy: Reflections on the Development over the last 150 Years," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 233(3), pages 423-445, May.
    4. Dumitriu, Ramona & Stefanescu, Razvan, 2014. "Perspective ale ţintirii inflaţiei
      [Perspectives of the Inflation Targeting]
      ," MPRA Paper 52943, University Library of Munich, Germany, revised 14 Jan 2014.

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