Selected for the Global Economic Symposium 2010
During the past decades, a broad consensus among economists and policy-makers has emerged that inflation targeting by central banks leads to very good macroeconomic outcomes. The “Great Recession” has casted doubt on this conventional wisdom. Many policy-makers and analysts blame the loose monetary policy stance of the Federal Reserve to be one of the main causes for the meltdown of the financial system and the “Great Recession.” Before the financial crisis, most central banks focused on low and stable consumer price inflation and used short-term interest rates as the main tool to implement their inflation target. Monetary aggregates and the supervision of other prices (e.g., asset prices) usually played a minor role in the actual conduct of monetary policy. Although most central bank tackled the issue of systematic risk and banking, most of them did not treat price stability and banking supervision as comprehensive issues. Quite frequently, central banks had de facto iron walls between the respective departments or they shared the responsibilities for banking supervision with other government bodies.
