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Lessons for monetary policy: What should the consensus be?

  • Issing, Otmar
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    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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    File URL: http://econstor.eu/bitstream/10419/57360/1/661566269.pdf
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    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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    1. Svensson, Lars E. O., 2005. "Monetary policy with judgment: forecast targeting," Working Paper Series 0476, European Central Bank.
    2. Vasco Cúrdia & Michael Woodford, 2009. "Credit Spreads and Monetary Policy," Discussion Papers 0910-01, Columbia University, Department of Economics.
    3. 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.
    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. Beck, Günter W. & Wieland, Volker, 2008. "Central bank misperceptions and the role of money in interest rate rules," CFS Working Paper Series 2008/25, Center for Financial Studies (CFS).
    6. repec:cup:cbooks:9780521516730 is not listed on IDEAS
    7. Claudio Borio & Haibin Zhu, 2008. "Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?," BIS Working Papers 268, Bank for International Settlements.
    8. 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.).
    9. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
    10. Charles Goodhart, 2010. "The changing role of central banks," BIS Working Papers 326, Bank for International Settlements.
    11. Hyun Song Shin & Kwanho Shin, 2011. "Procyclicality and Monetary Aggregates," NBER Working Papers 16836, National Bureau of Economic Research, Inc.
    12. Alan S. Blinder, 2010. "How Central Should the Central Bank Be?," Working Papers 1202, Princeton University, Department of Economics, Center for Economic Policy Studies..
    13. repec:cup:cbooks:9780521731867 is not listed on IDEAS
    14. 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.
    15. Charles Goodhart, 2010. "The Changing Role of Central Banks," FMG Special Papers sp197, Financial Markets Group.
    16. Fahr, Stephan & Motto, Roberto & Rostagno, Massimo & Smets, Frank & Tristani, Oreste, 2011. "A monetary policy strategy in good and bad times: lessons from the recent past," Working Paper Series 1336, European Central Bank.
    17. 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.
    18. Otmar Issing, 2009. "Asset Prices and Monetary Policy," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 45-51, Winter.
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