Monetary policy

Potential new monetary frameworks

As far as I know, four of the major central banks, including the U. S. federal reserve, the Bank of Canada, the European Central Bank and the Bank of England are conducting review of their monetary policies. This is a routine review as these banks have the mandate to revisit the approach of their monetary policies every four or five years. The ongoing review is significant as the policies have been in the vicinity of the low bound of interest rate, and inflation remains below target for over a decade and growths are tepid in countries other than the U. S.

Policy options under consideration include

  • making up the loses of inflation over the last decade. Price stability will use price target as goal. If adopted, easy monetary measures will not be changed for a long time and annual inflation will be allowed to overshoot above 2%. This is a very likely approach in my view.
  • nominal gross domestic product targeting. Currently central banks have no explicit target on economic growth. The Fed has a mandate of maximizing employment, a supporting role of economic growth. The ECB and other central banks have no explicit target on economic growth, similar to the Fed. If the nominal GDP target adopted, inflation target will likely be a secondary goal. Price stability is a founding reason for central banks, I think it is not likely for western central banks to adopt a growth target. They might choose to leave it to their government.
  • Broadening the tool kit to include forward guidance and negative interest rates. The ECB will likely keep the negative rate policy, and at the same time, manage to understand the pros and cons of the unconventional rate policy. But I do not think the U. S. Fed and the Bank of Canada will adopt this policy.
  • making clear what the government can do to help growth via fiscal policies, such as infrastructure building, trading, immigration etc.

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