Commentary: Monetary Policy after the Fall

Saturday, August 28, 2010

Economics Working Paper WP10106

Charles Bean and his colleagues at the Bank of England take the right approach to evaluating proposals for monetary policy going forward. They empirically examine policy leading up to and during the crisis and then draw several important policy conclusions. I agree with some of the conclusions, but not others.

I agree that low policy rates played a role in the housing boom and the search for yield and thereby the crisis, but I disagree that it was only a modest role without implications for future policy. I agree that the unorthodox policies have no role in normal times, but I disagree that these policies were always successful in the crisis. I agree that inflation targets should not be raised, but I disagree that we need new policy instruments, such as discretionary countercyclical capital buffers, to ward off financial crises in the future.

In this commentary I will focus on the disagreements because understanding them is crucial for deciding where monetary policy should be going in the decade ahead.

Commentary: Monetary Policy after the Fall