A Review of 'Is Monetary Policy Overburdened?'

The article written by Athanasios Orphanides raises the issue of whether or not governments have too high expectation on monetary policy to achieve long-term 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 possible end result of compromising its independence and credibility, thus diminishing its effectiveness in achieving its primary goal of price stability.

Price stability by 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. Orphanides stated that it is due to this single objective practice that allowed CBs to respond so flexibly and aggressively during the GFC in 2007, which helped the global economy to avoid another Great Depression. However, there was disappointing growth following the GFC, hence major CBs around the world introduced extremely low interest rates and generous liquidity provisions to tackle it, whereas governments were 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 t...

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...stability; and 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’