Alternative Monetary Policy and Central Banking

This paper points out policy suggestions for modern central banks to improve their effectiveness in terms of successfully targeting financial stability and employment. The theoretical foundations of the proposed policy suggestions rely on Minsky’s conceptualization of financial fragility and instability. It is argued that Minsky’s Financial Instability Hypothesis contextualizes how the financial structure of the effective demand and financial markets predispose to endogenous non-sustainable leverage and liability structures that result from position-making operations. We stress that Minsky advances an approach to central banking that is based on a cash-flow examination procedure to capture changes in the quality of leverage, solvency and liquidity of firms and banks that destabilize the macroeconomic system. We underline that Minsky patterns central banking and monetary policy within Ponzi financial practices and interconnections among financial institutions and financial markets. Following Minsky, we suggest discount window central banking, lender of last resort operations and targeting Ponzi finance as the most appropriate policies of modern central banks to deal with financial and macroeconomic instability.