ECB Bini Smaghi: Lessons for monetary policy from the recent crisis
20 January 2011
He stressed that the interlinkages between financial stability and price stability, as well as between monetary policy and prudential supervision, have become more evident as a result of the crisis.
He presented the following lessons from which monetary policy-makers can learn:
· Central bank independence remains critical to delivering price stability, particularly during crises.
· A clearly defined objective of price stability is essential to firmly anchor inflation expectations, which can act as an automatic stabiliser during a crisis.
· Monetary policy should be oriented at the medium term. Trying to fine-tune monetary policy on the basis of indicators, such as output gaps and measures of core inflation, which are either subject to ex post revisions or are misleading, may – and often does – induce an excess short-termism and entail serious risks.
· Monetary and financial variables should be a key input in the assessment of medium- to long-run risks to price stability, particularly during financial crises.
· Finally, price stability and financial stability are complementary. The new macro-prudential function and monetary policy reinforce each other.
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