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Lessons for Monetary Policy; What Should the Consensus Be?

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  • Otmar Issing

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.

Suggested Citation

  • Otmar Issing, 2011. "Lessons for Monetary Policy; What Should the Consensus Be?," IMF Working Papers 11/97, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:11/97
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    References listed on IDEAS

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    1. Tobias Adrian & Hyun Song Shin, 2009. "Prices and Quantities in the Monetary Policy Transmission Mechanism," International Journal of Central Banking, International Journal of Central Banking, vol. 5(4), pages 131-142, December.
    2. 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.
    3. DETKEN Carsten & SMETS Frank, "undated". "Asset Price Booms and Monetary Policy," EcoMod2003 330700042, EcoMod.
    4. Rüffer, Rasmus & Stracca, Livio, 2006. "What is global excess liquidity, and does it matter?," Working Paper Series 696, European Central Bank.
    5. 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, April.
    6. Vasco Curdia & Michael Woodford, 2010. "Credit Spreads and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 3-35, September.
    7. Charles R. Bean & Matthias Paustian & Adrian Penalver & Tim Taylor, 2010. "Monetary policy after the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 267-328.
    8. Detken, Carsten & Alessi, Lucia, 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.
    9. 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.).
    10. Hyun Song Shin & Kwanho Shin, 2011. "Procyclicality and Monetary Aggregates," NBER Working Papers 16836, National Bureau of Economic Research, Inc.
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    Citations

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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. Emmanuel Carré & Jézabel Couppey-Soubeyran & Salim Dehmej, 2015. "La coordination entre politique monétaire et politique macroprudentielle. Que disent les modèles dsge ?," Revue économique, Presses de Sciences-Po, vol. 66(3), pages 541-572.
    3. Issing Otmar & Wieland Volker, 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), De Gruyter, vol. 233(3), pages 423-445, June.
    4. Issing, Otmar, 2016. "Central banks: From overburdening to decline?," SAFE White Paper Series 42, Goethe University Frankfurt, Research Center SAFE - Sustainable Architecture for Finance in Europe.
    5. Roseline Nyakerario Misati & Esman Morekwa Nyamongo & Lucas Kamau Njoroge & Sheila Kaminchia, 2012. "Feasibility of inflation targeting in an emerging market: evidence from Kenya," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 4(2), pages 146-159, May.
    6. 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.
    7. repec:bla:obuest:v:79:y:2017:i:3:p:395-410 is not listed on IDEAS
    8. Philipp M. Hildebrand, 2013. "Why Central Banks Need a Macroeconomic Toolkit," Chapters,in: Stability of the Financial System, chapter 23 Edward Elgar Publishing.
    9. Käfer Benjamin, 2014. "The Taylor Rule and Financial Stability – A Literature Review with Application for the Eurozone," Review of Economics, De Gruyter, vol. 65(2), pages 159-192, August.
    10. repec:wsi:serxxx:v:59:y:2014:i:02:n:s0217590814800010 is not listed on IDEAS
    11. Hlebik Sviatlana & Verga Giovanni, 2015. "The European Central Bank Quantitative Policy and Its Consistency with the Demand for Liquidity," Scientific Annals of Economics and Business, De Gruyter Open, vol. 62(3), pages 425-451, November.

    More about this item

    Keywords

    Financial stability; Asset prices; Central banks and their policies; Monetary policy; Inflation targeting; ECB; inflation; central bank; price stability; Financial Markets and the Macroeconomy;

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