New Monetary Policy Guidelines: Losing the Anchor?

When assessing the question whether new doctrines, guidelines for monetary policy should be considered the experience of the past, mistakes or successes has to be analysed. For example – what have we learned from the period of the “great moderation” in which an improved monetary policy played a major role? The Fed and the European Central Bank (ECB) have reviewed their strategies. Both central banks have changed their inflation target. Inflation targeting as such is widely seen as the optimal strategy. However, no model of inflation targeting exists so far that integrates the risks from the banking system and financial markets with all their dynamics, non-linearities and overall complexity. The “second pillar” of the ECB's strategy can be seen as an approach to integrate these aspects into the process monetary policy decisions.

Controlling or more modestly guiding inflation expectations remains a major challenge for central banks. Forward guidance has become the main communication strategy to anchor inflation expectations. However, theory and practice have revealed severe problems of this approach.The expanding role of central banks has raised concerns about the independence of this institution. Overall, the role of central banks in society has to be reconsidered. Central bankers should not ignore the threat to their independence by involving themselves in political issues.