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Symposium 2015

Virtual Library File - Is inflation (or deflation) “always and everywhere” a monetary phenomenon?

The Challenge

With the onset of the Financial Crisis 2008 many central banks worldwide considerably eased their monetary policies. Some central banks, like the Federal Reserve, the European Central Bank, and the Ba ...

With the onset of the Financial Crisis 2008 many central banks worldwide considerably eased their monetary policies. Some central banks, like the Federal Reserve, the European Central Bank, and the Bank of England, quickly reached the zero-lower-bound on nominal interest rates; these central banks then started conducting extraordinary measures like quantitative easing and forward guidance. There is some consensus that this massive monetary stimulus in the first, ‘acute’, phase of the crisis was largely appropriate, preventing a second Great Depression. However, since then, discussion has turned toward how long monetary policy should remain highly expansionary, because of doubts about the effectiveness of expansionary monetary policy in the aftermath of banking crises. Moreover, expansionary monetary policy over a long period of time might be associated with adverse side effects such as financial instability, asset price bubbles, slower structural adjustment, distorted investment decisions, and inflation.

Masaaki Shirakawa, a former governor of the Bank Japan, lays out his views on monetary policy, price stability, and financial stability against the backdrop of the experiences the Bank of Japan made with the financial crisis beginning in 1997. He argues that price stability is a medium- to long-run rather than a short-run concept. Moreover, he argues that monetary policy should take financial stability issues into account and that cooperation among various policy-makers as well as international cooperation is important to achieve price stability.