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‘New Normal’ or ‘New Orthodoxy’? Elements of a Central Banking Framework for the After-Crisis

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  • Christian Pfister, Natacha Valla

Abstract

Two different approaches to central banking in the aftermath of the crisis are contrasted. In the first one, labelled ‘New Normal’, the monetary policy strategy is broadened to encompass such objectives as financial stability or full employment. Furthermore, the inflation target is raised and large scale asset purchases (LSAPs) are retained as a standard instrument for implementing monetary policy. In the second approach, which we label ‘New Orthodoxy’, central banks keep the same objectives but interest rates can be brought to unprecedented negative levels, thus making LSAPs possibly unnecessary. The role of central banks in preserving financial stability is also explicitly recognized, both by themselves and by society, making their contribution to this task more effective and transparent.

Suggested Citation

  • Christian Pfister, Natacha Valla, 2018. "‘New Normal’ or ‘New Orthodoxy’? Elements of a Central Banking Framework for the After-Crisis," Working papers 680, Banque de France.
  • Handle: RePEc:bfr:banfra:680
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    Keywords

    Central banks; Monetary policy; Financial stability;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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