Monetary Policy: A subtle paradigm shift?
& Philip Lowe
Published: June 2003
A growing challenge for central banks is to secure monetary and financial stability
simultaneously. Indeed, somewhat paradoxically, success in controlling inflation
can sometimes contribute to the development of imbalances that ultimately lead
to financial stresses, with potentially serious macroeconomic consequences. And a
monetary regime that does not take these imbalances into account may unwittingly
accommodate their further build-up. Accordingly, despite the difficulties
involved, it may be desirable, in some circumstances, for monetary policy to be
used to contain financial imbalances before they grow too large, even if the
imbalances pose no immediate threat to inflation. Justifying such a response
would not require redefining the ultimate objectives of monetary policy. It would,
however, arguably call for adopting longer policy horizons than are commonly
used and paying greater attention to the balance of risks facing the economy.