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Is monetary policy overburdened? by Athanasios Orphanides
Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily fit in the realm of traditional monetary policy. This paper examines three broad public policy goals that may overburden monetary policy: full employment, fiscal sustainability and financial stability. While central banks have a crucial position in public policy, the appropriate policy mix also involves other institutions, and overreliance on monetary policy to achieve these goals is bound to disappoint. Central bank policies that facilitate postponement of needed policy actions by governments may also have longer-term adverse consequences that could outweigh more immediate benefits. Overburdening monetary policy may eventually diminish and compromise the independence and credibility of the central bank, thereby reducing its effectiveness in maintaining price stability and contributing to crisis management.
Global spillovers and domestic monetary policy by Menzie D Chinn
Chinn discusses how the unconventional monetary policy measures implemented over the past several years - quantitative and credit easing, and forward guidance - can be analysed in the context of conventional models of asset prices, with particular reference to exchange rates. Then alternative approaches are discussed to interpreting the effects of such policies, and the empirical evidence reviewed. Finally, Chinn examines the ramifications for thinking about the impact on exchange rates and asset prices of emerging market economies. The conclusion is that although the implementation of unconventional monetary policy measures may introduce more volatility into global markets, in general it will support global rebalancing by encouraging the revaluation of emerging market currencies.
International monetary policy coordination: past, present and future by John B Taylor
This paper examines two explanations for the recent spate of complaints about cross-border monetary policy spillovers and calls for international monetary policy coordination, a development that contrasts sharply with the monetary system in the 1980s, 1990s and until recently. The first explanation holds that deviations from rules-based policy at several central banks created incentives for other central banks to deviate from such policies. The second explanation either does not see deviations from rules or finds such deviations benign; it characterises recent unusual monetary policies as appropriate, explains the complaints as an adjustment to optimal policies, and downplays concerns about interest rate differentials and capital controls. Going forward, the goal for central banks should be an expanded rulesbased system similar to that of the 1980s and 1990s, which would operate near an international cooperative equilibrium. International monetary policy coordination - at least formal discussions of rules-based policies and the issues reviewed here - would help central banks get such equilibrium.