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Research Summary

  • Economics

Monetary Policy in Flux

Director—Global Economic Research
Senior Economist—Europe
January 08, 2014

Central-banking doctrine and practice have evolved considerably over time. Following a period in which unconventional policy tools have been deployed to prevent a repeat of the Great Depression, we believe that monetary policy is now in a transitional phase.

Near-zero interest rates and the purchase of government bonds, or quantitative easing, have created unprecedented conditions. In particular, central bank balance sheets have expanded on a record scale in most countries affected by the crisis (Display).

This paper argues that the new monetary policy doctrine may lead to an even broader mandate for central banks. It is likely to emphasize avoiding deflation and promoting financial stability as prerequisites for good macroeconomic outcomes and lower unemployment over the medium term. In addition, we believe that policymakers will probably put more emphasis on asset-price developments, instead of just focusing on consumer price inflation. Even so, central banks could still risk a repeat of the recent boom/bust cycle because they no longer have a true monetary anchor to guide their policies.

Central Bank Balance Sheets Have Mushroomed
Change in Base Money Since January 2008

Through November 30, 2013
Base money is notes and coins in circulation plus commercial bank reserves held at the central bank. This is the part of a central bank’s balance sheet most directly affected by monetary operations and, therefore, the best way of comparing these countries’ central banks’ responses to the crisis.
Source: Haver Analytics

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