A Review of First Monetary Policy Overburdened Essay

A Review of First Monetary Policy Overburdened Essay

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This discussion paper written by Athanasios Orphanides, raises the issue of whether or not governments have too high an expectation on monetary policy to achieve long-term public policy goals which can only be accomplished “by the appropriate policy mix and the cooperation of other public institutions.” Orphanides focused on three major goals burdened on Central banks (CB) which are full employment, fiscal sustainability and financial stability; and developed his arguments using four typical economies, US, Japan, UK and Euro area. He claimed that especially after the GFC, monetary policy is compelled to achieve these goals which are beyond its traditional responsibility with the end result of compromising its independence and credibility, hence diminishing its effectiveness in achieving its primary goal of price stability.

Price stability via Inflation targeting (IT) was emphasised to be the only objective of CBs in the late 20th century as the multiple-objective approach failed to address many economies’ high inflation problem at that time. This single objective practice allowed CBs to respond flexibly and aggressively during the GFC in 2007, which helped the global economy to avoid another Great Depression. However, major CBs around the world had to introduce extremely low interest rates and generous liquidity provisions to tackle the disappointing growth followed the GFC. This let governments become reluctant to adjust their policies after the crisis and abused monetary policy as it was understood to be ‘the only game in town’.

However, Orphanides pointed out that, factors behind “the lack of satisfactory growth in the aftermath of the GFC” are often outside the control of CBs. One of them is the low employment growth p...


... middle of paper ...


...nd by exploiting empirical evidences from four major economies to support his views. In my perspective, CB should pursuit to partner with the government to achieve the broad fiscal goals under the conditionality that the primary objective of price stability isn’t jeopardized in the medium run.



Works Cited

Borio, Claudio and William R. White (2003). “Whither monetary and financial stability? The implications of evolving policy regimes", in Monetary Policy and Uncertainty: Adapting to a Changing Economy, Kansas City, 131-212.

Central Banking Newsdesk, Nov 16, 2012, ‘SNB’s Jordan warns against overburdening monetary policy’
Orphanides, A. 2013, 'Is Monetary Policy Overburdened?’, Federal Reserve Bank of Boston, Public Policy Discussion Papers, No.13-8, http://www.bostonfed.org/economic/ppdp/
The Economist, June 30, 2012, ‘Central banks: Don’t give up’

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