What monetary policy can do

Thank you for the opportunity to participate in this discussion on monetary policy and what it can and can’t do. In thinking about this topic, it occurred to me that one side of the question—what it can’t do—generates a very long list. So for today’s discussion,I intend to focus on the positive and...

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Bibliographic Details
Published in:The Cato journal 2016-03, Vol.36 (2), p.261
Main Author: Lacker, Jeffrey M
Format: Article
Language:English
Subjects:
Aims and objectives
Bank reserves
Banking
Central banks
Economic activity
Economic conditions
Economic models
Federal funding
Federal funds rate
Forecasts and trends
Inflation
Inflation (Economics)
Interest rates
Liability
Monetary policy
Phillips curve
Price levels
Private banking
Recessions
Securities
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Summary:Thank you for the opportunity to participate in this discussion on monetary policy and what it can and can’t do. In thinking about this topic, it occurred to me that one side of the question—what it can’t do—generates a very long list. So for today’s discussion,I intend to focus on the positive and discuss the one thing that I think we should be pretty certain monetary policy can indeed do, and that is to deter-mine the long-run path of the price level. Recent experience has caused some to question whether monetary policy’s ability to achieve even this modest goal has diminished or been lost in the years since the Great Recession.I will argue that a central bank’s ability to influence inflation and how it does so is essentially unchanged.I also believe that monetary policy’s ability to affect inflation is essentially independent of its effects on real economic activity, which I view as limited and temporary. My view of what monetary policy can do is based on the (perhaps old-fashioned) idea that money creation is at the heart of price level determination.
ISSN:0273-3072
1943-3468