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Symposium 2012

Solution for The Future of Central Banking: Inflation Targeting versus Financial Stability

The Challenge

The global financial crisis has led to a profound rethinking of the consensus on monetary policy. Before the crisis, most monetary economists agreed that "flexible inflation targeting"—in which cent ...

The global financial crisis has led to a profound rethinking of the consensus on monetary policy. Before the crisis, most monetary economists agreed that "flexible inflation targeting"—in which central banks focus on maintaining price stability and stabilizing the output gap—was an appropriate and sufficient mandate for conducting monetary policy. Key assumptions underlying the consensus were that this mandate would automatically lead to financial stability and that the framework of monetary policy could deal with cross-border capital flows.

Create a World Monetary Authority to promote a multilateral approach among central banks.

Coordination among central banks was limited during the crisis. But international coordination is a necessary condition for global financial stability and it needs to be enhanced.

The Bank for International Settlements could be developed into a World Monetary Authority that coordinates important monetary policy decisions and unconventional monetary interventions. Central banks from both the advanced and emerging economies would have to participate in the new body. With their collective rise to political and economic power, Brazil, Russia, India and China (the “BRICs”) could take a lead here.

International coordination is also vital given the growth of cross-border banking relations. This needs to be complemented by international coordination of the “lender of last resort” function among central banks (notably for currency swaps between them).

    Related Solutions

    Solution
    Symposium 2012

    Central banks should adopt "default countercyclical policy," using the "comply or explain" approach.

    Central banks should adopt "default countercyclical policy," using the "comply or explain" approach.

    Central banks should adopt "default countercyclical policy," using the "comply or explain" approach.

    Polity
    Solution
    Symposium 2012

    Delivering price stability must remain central banks’ primary goal.

    Delivering price stability must remain central banks’ primary goal.

    Delivering price stability must remain central banks’ primary goal.

    Polity