This prideful interpretation amounted to the siren song of an extremely accommodative monetary policy. Unable to disentangle the global and domestic pressures suppressing inflation, a price targeting Fed has erred consistently on the side of easy money.

Besides structural reforms, building new momentum will require pulling all possible levers that can support global demand. Accommodative monetary policy will remain essential for as long as growth remains anemic though we must pay careful attention to potential spillovers.

China s Monetary Policy Surprise

China s Monetary Policy Choice

Monetary policy and institutions

The disinflation and ample liquidity created by the accommodative monetary policy of central governments have driven the market interest rates down to the extent that the fixed income markets no longer offer the returns that investors have enjoyed in the past.

Why is Monetary Policy Underrated?

Shinzo Abe s Monetary Policy Delusions

The ramifications for interest rate spreads, emerging market equities, and housing demand, among much else, are the subject of widespread debate. But, as markets learn to cope with a less accommodative monetary policy, there could be an important silver lining, which most people have ignored.

1. Strongly anti inflationary monetary policy.

What Monetary Policy Does China Need?

First, it is important to acknowledge that weak aggregate demand and anemic economic growth, not an acceleration in the labor displacement rate, explains the slow jobs growth of the last decade. Under these conditions, monetary policy should remain accommodative and further fiscal austerity should be eschewed.

Is US Monetary Policy Made in China?

It is time to adjust monetary policy.

These exclusive affairs of State include external relations, defence policy and monetary policy.

Typically, monetary policy is one of the policy tools for managing the balance of payments.

The market had strongly expected adjustments to UK monetary policy.

And that leverage much of it the result of monetary expansion in most of the world s advanced economies is not even serving the goal of boosting long term aggregate demand. After all, accommodative monetary policies can, at best, merely buy time for more durable sources of demand to emerge.

Of course, a country s monetary policy does affect exchange rates in the short term. But it does so only in relation to monetary policy in other relevant countries.

It would be a different matter if we were to decide to buy bonds issued by euro area sovereigns the only market where size would generally not be an issue. Interventions in this market would likely entail a stronger signal that the ECB is committed to maintaining an accommodative monetary policy for an extended period of time.

The territorial Executive shall be consulted with respect to decisions on monetary policy.

In any case, the success of monetary policy is difficult to deny. As the deflation gap narrows, however, the overall impact of monetary policy will weaken, as it increasingly influences prices more than output.

Still to be argued out within the guild of economists , Samuelson wrote in 1969, is the proper quantitative potency of monetary versus fiscal policy. This question eventually was resolved in favor of monetary policy.

For the US, the combination of a stronger economy and less accommodative monetary policy will put additional upward pressure on the dollar s exchange rate which has already appreciated significantly against both the euro and the yen. With few other countries willing to allow their currencies to strengthen, the dollar s tendency toward appreciation will remain strong and broad based, potentially triggering domestic political opposition.

This argument has proved convincing in policy and political circles, leading officials to focus on a new approach centered on so called macro prudential tools, including capital requirements and leverage ratios, to curb excessive risk taking by banks. While this approach has some merit, it is incomplete, as it fails to address the egregious mispricing of risk brought about by an overly accommodative monetary policy and the historically low interest rates that it generated.

Despite legitimate questions about the effectiveness of its unconventional and ever experimental policy stance, the Fed appears willing to be even more activist if the economy weakens. Indeed, if the Fed makes an inadvertent mistake (the likelihood of this is considerable, given the country s complex situation and the unusually uncertain outlook), it is more likely to err on the side of staying accommodative for too long, rather than tightening monetary policy prematurely.

This is not the type of volatile monetary policy that Europe wants or needs.

Monetary policy needs to look beyond its core focus on low and stable inflation and pay much greater attention to financial stability. The debate now is how, exactly, to factor this imperative into monetary policy, and how to coordinate the work of monetary and regulatory authorities.

Moreover, unlike major developed economies, most of which have used up all of their conventional monetary policy ammunition by reducing their policy interest rates to zero, China has plenty of monetary stimulus on reserve to address cyclical disruptions. In these circumstances, it makes sense for China to lean more on monetary policy than on fiscal expansion.

Domestic monetary policy has become the first and last line of defense against growth slowdowns and financial panics, enabling policymakers to avoid pursuing other important, but far more difficult measures. Using monetary policy to compensate for deficiencies in other policy areas constitutes an institutional breakdown monetary policymakers are not necessarily getting it wrong, but they are constrained by the configuration of other policies.

If monetary policy is used to try to push unemployment below some pre determined level, inflation will accelerate without limit and destroy jobs. A monetary policy aiming for sub NAIRU unemployment must therefore be avoided at all costs.

Europe s monetary unification of the 1990 s was supposed to be accompanied by fiscal convergence and harmonization. When budgets move in different directions, pressures shift to regional policy (to redistribute income) and to monetary policy (to boost growth).

And we know how to do that accommodative monetary policy fiscal adjustment in all advanced economies that includes concrete and realistic plans to reduce debt over the medium term, but does not undercut short term growth completing the banking sector cleanup and reforms to boost productivity and growth potential. All of this should be complemented by a rebalancing of global demand toward dynamic markets, including emerging economies.

The current approach, centered on unconventional monetary policy, is not the answer. Though monetary policy provided a powerful antidote to frozen credit markets in the depth of the global financial crisis, it has failed to spark classic cyclical recoveries.

The ECB has never claimed that its strategy is the ultimate solution to the challenges monetary policy is confronted with. But, it has recognised the need to include monetary analysis in a very broad sense into its policy considerations.

In China, unlike in advanced countries, monetary and sterilization policy are often one in the same. The degree to which monetary policy is expansionary depends on the degree to which the liquidity created by currency market intervention has been sterilized.

The International Monetary Fund continued to assist the Government, through a close policy dialogue, in maintaining macroeconomic stability, especially in the area of fiscal policy.

The German fascination with gold is a red herring. Its fear of wayward monetary policy is not.

Policy would still be accommodative if the Fed maintained low interest rates rather than the zero level that was appropriate for a panic. And this would give savers less of an incentive to search for yield, thus avoiding financial instability.

This is not to say that sudden normalization of monetary policy is a good idea. But, if large scale investment and reform programs were initiated as complements to unconventional monetary policy measures, the economy could move onto a more resilient growth path.

In principle, the answer is straightforward. If a central bank has two policy targets, then it needs two instruments monetary policy to influence aggregate demand, and regulatory policy to limit financial risks.

Secondly, it would insulate domestic economies from external developments, thereby permitting monetary policy to focus on redressing unemployment.

A seminar in Ukraine, organized with the International Monetary Fund, examined problems of wage policy, including wage arrears.

A two year project with the International Monetary Fund on macroeconomic policy had recently come to an end with positive results relating to fiscal, exchange and monetary targets and structural reform.

The proactive fiscal policy that Li pledged at Davos will help, but monetary policy also needs to change. The conundrum facing China s authorities is that monetary expansion would merely fuel a run up in asset prices, rather than resulting in higher credit flows to the real economy.