The essay proffers three observations or 'working hypotheses' on central banking:
- "monetary policy contributed significantly to the financial crisis"
- "an aggressive and prolonged easing of monetary policy, through interest-rate and balance-sheet measures, to respond to the bust of a major financial boom has serious limitations"
- "to keep one's house in order is not enough"
Even as we enter the 4th quarter of 2011, the year has already seen a slew of monetary policy extremes, but extremes aside, central banks have come under a lot of criticism through the crisis, and the pressure is heavy to respond to the challenges:
"During the Great Moderation, central banks sometimes came to be seen as all-powerful by the markets and the public at large. Nor, in all honesty, did they do much to dispel that belief. Now that the crisis has struck, they are facing enormous pressures to prove that they can manage the economy, restore full employment, ensure strong growth and preserve price stability. This, in fact, is a taller order than many believe, and one that central banks alone cannot deliver. To pretend otherwise risks undermining their credibility and public support in the longer run."
Read the full essay and add your thoughts below: http://www.bis.org/publ/work353.htm