Monetary policy in the grip of a pincer movement

Claudio Borio, Piti Disyatat, John Juselius and Phurichai Rungcharoenkitkul

No 706, BIS Working Papers from Bank for International Settlements

Abstract: Monetary policy has been in the grip of a pincer movement, caught between growing financial cycles, on the one hand, and an inflation process that has become quite insensitive to domestic slack, on the other. This two-pronged attack has laid bare some of the limitations of prevailing monetary policy frameworks, particularly in the analytical notions that have guided much of its practice. We argue that the natural rate of interest as a guidepost for monetary policy has a couple of limitations: the concept, as traditionally conceived, neglects the state of the financial cycle in the definition of equilibrium; in addition, it underestimates the role that monetary policy regimes may play in persistent real interest rate movements. These limitations may expose monetary policy to blindsiding by the collateral damage that comes from an unhinged financial cycle. We propose a more balanced approach that recognises the difficulties monetary policy has in fine-tuning inflation and responds more systematically to the financial cycle.

Keywords: monetary policy; financial stability; financial cycle; natural interest rate; inflation (search for similar items in EconPapers)
JEL-codes: E32 E40 E44 E50 E52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2018-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Chapter: Monetary Policy in the Grip of a Pincer Movement (2019)
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