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"Is Modern Central Banking Ancient History?", asks Manoj Pradhan from Morgan Stanley
10/25/11
I "thought that modern central banking" means mainly monetary expansion. Good to hear that inflation targeting has obviously been considered "modern" until recently. The perception was definitely a different one...
Morgan Stanley: Is Modern Central Banking Ancient History? by Manoj Pradhan, Oct. 21, 2011
Two of the three principles of modern central banking were designed for a regime that developed economies will not see for the foreseeable future. The principles - (i) inflation targeting improves growth prospects in the medium run; (ii) inflation targeting effectively means inflation forecast targeting; and (iii) a ‘conservative' central banker (i.e., one who dislikes inflation more than the average economic agent) can deliver lower and less volatile inflation - are almost unquestioned among the central banking orthodoxy. However, these principles were espoused in an era of low debt when monetary policy was the dominant force. In the era we now live in, where debt, deficits and deleveraging (a DDD regime) are the dominant drivers of the economy and policy - an era of so-called ‘fiscal dominance' - the first and the last tenets can cause more harm than good. Inflation targeting and an aggressive approach to taming inflation in such times can create more volatile inflation and higher sovereign risks. read more
Keywords: Monetary Policy, Central Banking
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