It has become fashionable to worry whether central banks still have the tools with which to pursue price stability, full employment, and other objectives. But policymakers should not lose sight of the fact that a central bank's primary job is to maintain financial stability as a lender and market maker of last resort.
NEW YORK – Most modern central banks regard macroeconomic stability – meaning price stability or, in some cases, price stability alongside full employment – as their main goal. But the Bank of Japan and the European Central Bank seem to be running out of tools with which to pursue this goal effectively. And the Bank of England and the US Federal Reserve could soon find themselves in a similar position. Whenever the next cyclical downturn arrives, the effective lower bound on the policy rate will once again become a binding constraint on monetary policymaking (a situation known as a “liquidity trap”).
NEW YORK – Most modern central banks regard macroeconomic stability – meaning price stability or, in some cases, price stability alongside full employment – as their main goal. But the Bank of Japan and the European Central Bank seem to be running out of tools with which to pursue this goal effectively. And the Bank of England and the US Federal Reserve could soon find themselves in a similar position. Whenever the next cyclical downturn arrives, the effective lower bound on the policy rate will once again become a binding constraint on monetary policymaking (a situation known as a “liquidity trap”).