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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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    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
    Date of revision:
    Handle: RePEc:zbw:cfswop:201113
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    1. Issing,Otmar & Gaspar,Vitor & Angeloni,Ignazio & Tristani,Oreste, 2001. "Monetary Policy in the Euro Area," Cambridge Books, Cambridge University Press, number 9780521783248.
    2. 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, 04.
    3. 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.
    4. Svensson, Lars E. O., 2005. "Monetary policy with judgment: forecast targeting," Working Paper Series 0476, European Central Bank.
    5. Joao Sousa & Andrea Zaghini, 2008. "Monetary policy shocks in the euro area and global liquidity spillovers," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(3), pages 205-218.
    6. 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.
    7. Vasco Cúrdia & Michael Woodford, 2009. "Credit spreads and monetary policy," Staff Reports 385, Federal Reserve Bank of New York.
    8. 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.
    9. Issing,Otmar, 2008. "The Birth of the Euro," Cambridge Books, Cambridge University Press, number 9780521731867.
    10. Charles Goodhart, 2010. "The changing role of central banks," BIS Working Papers 326, Bank for International Settlements.
    11. Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
    12. 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.).
    13. 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.
    14. Alan S. Blinder, 2010. "How Central Should the Central Bank Be?," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 123-133, March.
    15. Charles Goodhart, 2010. "The Changing Role of Central Banks," FMG Special Papers sp197, Financial Markets Group.
    16. Lawrence J. Christiano & Massimo Rostagno, 2001. "Money Growth Monitoring and the Taylor Rule," NBER Working Papers 8539, National Bureau of Economic Research, Inc.
    17. Otmar Issing, 2009. "Asset Prices and Monetary Policy," Cato Journal, Cato Journal, Cato Institute, vol. 29(1), pages 45-51, Winter.
    18. Issing,Otmar, 2008. "The Birth of the Euro," Cambridge Books, Cambridge University Press, number 9780521516730.
    19. Hyun Song Shin & Kwanho Shin, 2011. "Procyclicality and Monetary Aggregates," NBER Working Papers 16836, National Bureau of Economic Research, Inc.
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