Below is a list of very important topics, all of them relate in one way or another to what the central bank should target and what should be in the central bank loss function. Should central bank follow the dual mandate, the way Fed does, should it use money as a useful indicator, and finally, is price stability optimal in the world with many types of households. Take a look:
- A.Pescatori paper on incomplete markets and optimal monetary policy. From quick reading I understood that when one introduces various types of households into the model, then the central bank loss function should be augmented with additional variable, which deviations from optimal level should be minimized. This variable is a measure of household consumption dispersion. I will read this paper in full length later becasue it ends on a “heretic” note: “As last remark, we observe that a high dispersion in the initial net-debt positions does call into question the price stability goal. In this case, aggregate shocks affecting the natural rate of the economy would imply a large and persistent deviation from zero inflation“.
- Ben Bernanke speech on central banking in US
- Gourinchas, Lopez and Rey presentation showing what lessons US should learn from UK history some 100 years ago, regarding its giant negative external position. I fully agree with conclusions, US exorbitant priviledge will be gone as the UK priveledge ceased to exist, but it will happen much faster amid rising Asia.
- Bordo and Filardo paper looks at historical evidence and comes with a powerful conclusions, do not abandon money in the monetary policy framework. This paper (as every paper produced by these authors) is definitely worth reading in full, I quick-read it and some policy conclusions caught my eye: “With regard to monetary policy frameworks, the zonal view makes a strong case for central bank flexibility. Central banks have clearly made great advances in economic welfare by bringing inflation down and keeping it stable. In the low inflation environment, the evidence to date suggests that short-term interest rates have been fairly reliable guides. However, past success does not guarantee future returns. While the possibility of a break-out of double-digit inflation seems negligible at this juncture, the risk of deflation remains a constant threat. In a low inflation environment, unless macroeconomic control becomes remarkably better, (bad) deflation might always be one recession away. This aspect of the policy environment cautions against complacency, especially with respect to the temptation to assume that reliable policy guideposts in one zone means that the monetary policy Holy Grail has been found. This suggests that central bankers need to be conservative not only about price stability but also about the current policy paradigm. As argued above, the early inflation targeting regimes were too narrowly focused. An indication of progress has been the movement of inflation targeting central banks to make inflation horizons more flexible. Our analysis would suggest that these central banks could go farther by adopting a more robust policy framework. Most central banks need only look to the ECB and Bank of Japan. [….]. The historical record isreplete with examples of when policymakers thought they had mastered the art of central banking only to find the opposite to be so. The Great Inflation and the Great Depression were ultimately caused by major policy mistakes. In both cases, more prudent (in retrospect) use of the monetary aggregates might have generated very different outcomes. […] At a minimum, central banks should not abandon the monetary (and credit) aggregates in their monetary policy toolkit. […] An additional consideration in interpreting the recent past is the use of the monetary aggregates and real interest rates as communication devices. With growing interest in transparency, central banks have been seeking the best ways to explain their policy frameworks and decisions to the public. The past complications associated with money multipliers, velocity shifts and the choice of the appropriate monetary aggregate have given interest rates an advantage. And, in the current low inflation environment, velocity developments still appear fairly volatile and difficult to predict over the short run. Over the medium-term and long-term, however, the more predictable relationships suggest that the monetary aggregates can play a role not only in the policy briefing process but also in informing the public about the intentions of policy makers and in assessing their performance.”
- Support to use money in monetary policy framework comes also from Swiss National Bank working paper by S.Reynard.
- Mark Thoma on his blog duscusses whether US Fed dual mandate is superio to inflation targeting.
I predicted the big money come back to economic models and monetary policy frameworks (in my book, in Polish, presented on my blog). I also said that in a not-too-distant-future money will fall out of grace again after major e-money innovations will take place.