c923590446f86f380e922228_pa2684c.jpg Paul Lachine

The Return of Monetarism

Over the last 30 years or so, many central bankers supposed that all they needed to do was keep their sights fixed on price stability. But we now know that they must also attend to financial stability, and that their ability to set interest rates cannot be used to achieve both aims simultaneously.

TILBURG, THE NETHERLANDS – The current economic crisis highlights the need for major changes at central banks. It is time for a return to some form of moderate monetarism – but in a twenty-first-century mold.

The current crisis has clearly made central bankers’ jobs far more complicated. Over the last 30 years or so, many central bankers supposed that all they needed to do was keep their sights fixed on price stability. Every instrument they had at their disposal was to be used for that goal. From now on, however, central bankers will have to aim for financial stability as well.

Implicitly, central banks will also have to try to ensure that a new recession does not occur. But the current institutional set-up of today’s central banks is highly inadequate to meeting these challenges. Central banks will have to get additional tools for their new tasks. And that is where things get very complicated.

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