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Monetary Policy Lessons from the Crisis

  • Athanasios Orphanides

    ()

    (Central Bank of Cyprus)

This paper provides a policymaker's perspective on some lessons from the recent financial crisis. It focuses on questions in three areas. First, what lessons can be drawn regarding the institutional framework for monetary policy? Has the experience changed the pre-crisis consensus that monetary policy is best performed by an independent central bank focused on achieving and maintaining price stability? Second, what lessons can be drawn regarding the monetary policy strategy that should be followed by a central bank? How activist should a central bank be in dampening macroeconomic fluctuations? Should the "output gap" serve as an important policy guide? Are there lessons regarding the stability-oriented approach followed by the ECB? How activist should a central bank be in tackling perceived asset price misalignments? Does the ECB's monetary analysis pillar help incorporate the pertinent information in formulating policy? Third, is monetary policy pursuing price stability enough to ensure overall stability in the economy? Or is there room for improvement regarding how central banks can contribute to financial stability? Should the role of monetary policy be seen as completely separate from the broader istitutional environment governing financial markets and institutions in our economy? Or would greater central bank involvement in regulation and supervision pertaining to credit and finance allow better management of overall economic stability?

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File URL: http://www.centralbank.gov.cy/media/pdf/NPWPE__No1_052010__.pdf
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Paper provided by Central Bank of Cyprus in its series Working Papers with number 2010-1.

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Length: 43 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:cyb:wpaper:2010-1
Contact details of provider: Web page: http://www.centralbank.gov.cy/nqcontent.cfm?a_id=1

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  1. Athanasios Orphanides & John Williams, 2011. "Monetary Policy Mistakes and the Evolution of Inflation Expectations," NBER Working Papers 17080, National Bureau of Economic Research, Inc.
  2. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
  3. John B. Taylor & John C. Williams, 2010. "Simple and robust rules for monetary policy," Working Paper Series 2010-10, Federal Reserve Bank of San Francisco.
  4. A. Orphanides & J. Williams, 2003. "The decline of activist stabilization policy: natural rate misperceptions, learning, and expectations," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  5. Lars E.O. Svensson, 2002. "Inflation Targeting: Should It Be Modeled as an Instrument Rule or a Targeting Rule?," NBER Working Papers 8925, National Bureau of Economic Research, Inc.
  6. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
  7. Athanasios Orphanides & Simon van Norden, 2002. "The Unreliability of Output-Gap Estimates in Real Time," The Review of Economics and Statistics, MIT Press, vol. 84(4), pages 569-583, November.
  8. William R. White, 2006. "Is price stability enough?," BIS Working Papers 205, Bank for International Settlements.
  9. Beck, Günter & Wieland, Volker, 2008. "Central Bank Misperceptions and the Role of Money in Interest Rate Rules," CEPR Discussion Papers 6947, C.E.P.R. Discussion Papers.
  10. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
  11. Orphanides, Athanasios & Williams, John C., 2008. "Learning, expectations formation, and the pitfalls of optimal control monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages S80-S96, October.
  12. Thomas Laubach and John C. Williams, 2001. "Measuring the Natural Rate of Interest," Computing in Economics and Finance 2001 35, Society for Computational Economics.
  13. Athanasios Orphanides & John C. Williams, 2003. "Robust monetary policy rules with unknown natural rates," Finance and Economics Discussion Series 2003-11, Board of Governors of the Federal Reserve System (U.S.).
  14. Franco Modigliani & Lucas Papademos, 1978. "Optimal demand policies against stagflation," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 114(4), pages 736-782, December.
  15. Yates, Tony, 2002. "Monetary policy and the zero bound to interest rates: a review," Working Paper Series 0190, European Central Bank.
  16. Vasco Curdia & Michael Woodford, 2010. "The Central Bank Balance Sheet as an Instrument of Monetary Policy," Discussion Papers 0910-16, Columbia University, Department of Economics.
  17. Franco Modigliani & Lucas Papademos, 1975. "Targets for Monetary Policy in the Coming Year," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 141-166.
  18. Fischer, Stanley, 1981. "Towards an understanding of the costs of inflation: II," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 5-41, January.
  19. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
  20. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  21. Stanley Fischer & Franco Modigliani, 1978. "Towards An Understanding of the Real Effects and Costs of Inflation," NBER Working Papers 0303, National Bureau of Economic Research, Inc.
  22. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
  23. Clark, Todd E. & Kozicki, Sharon, 2005. "Estimating equilibrium real interest rates in real time," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 395-413, December.
  24. Beck, Günter & Wieland, Volker, 2007. "Money in Monetary Policy Design: A Formal Characterization of ECB-Style Cross-Checking," CEPR Discussion Papers 6097, C.E.P.R. Discussion Papers.
  25. John C. Williams, 2003. "The natural rate of interest," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct31.
  26. Clouse James & Henderson Dale & Orphanides Athanasios & Small David H. & Tinsley P.A., 2003. "Monetary Policy When the Nominal Short-Term Interest Rate is Zero," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-65, September.
  27. Donald L. Kohn, 2009. "Monetary Policy and Asset Prices Revisited," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 31-44, Winter.
  28. Stephen G. Cecchetti & Hans Genberg & Sushil Wadhwani, 2002. "Asset Prices in a Flexible Inflation Targeting Framework," NBER Working Papers 8970, National Bureau of Economic Research, Inc.
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