Is Monetary Policy Overburdened?

39 Pages Posted: 27 Feb 2014

See all articles by Athanasios Orphanides

Athanasios Orphanides

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Asia School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 2013

Abstract

Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily fit in the realm of traditional monetary policy. This paper examines three broad public policy goals that may overburden monetary policy: full employment, fiscal sustainability and financial stability. While central banks have a crucial position in public policy, the appropriate policy mix also involves other institutions, and overreliance on monetary policy to achieve these goals is bound to disappoint. Central bank policies that facilitate postponement of needed policy actions by governments may also have longer-term adverse consequences that could outweigh more immediate benefits. Overburdening monetary policy may eventually diminish and compromise the independence and credibility of the central bank, thereby reducing iits effectiveness in maintaining price stability and contributing to crisis management.

Keywords: Global financial crisis, monetary policy, real-time output gap, fiscal dominance, financial stability, central bank independence

JEL Classification: E50, E52, E58

Suggested Citation

Orphanides, Athanasios, Is Monetary Policy Overburdened? (December 2013). BIS Working Paper No. 435, Available at SSRN: https://ssrn.com/abstract=2384449

Athanasios Orphanides (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=54058

Asia School of Business ( email )

Jalan Kuching, Kuala Lumpur, Wilayah Persekutuan K
Kuala Lumpur, MA
Malaysia

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