Where do central banks go from here?

Lars E.O. SvenssonSveriges Riksbank

Panel discussion, Norges Bank Symposium onWhat is a Useful Central Bank?

November 18, 2010

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Background The financial crisis was caused by other factors than

monetary policy MP and financial-stability policy (FSP) are distinct

and different – it was FSP that failed, not MP FSP and MP: Distinguish according to (1) objectives,

(2) instruments, and (3) authority in charge Financial stability (FS) as an objective of MP makes

little sense – but makes sense as an objective of the central bank, if the central bank has the suitable instruments

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Monetary policy after the crisis Flexible inflation targeting (FIT) is fine

– before, during, and after the crisis But greater role for financial conditions in transmission

mechanism FS may imply restrictions on MP – rare event Normally, handle FS w/ FSP, not w/ MP

(principle of comparative advantage) Do not use MP to target housing prices FIT with mean squared gaps (MSGs) – another step

towards increased transparency

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Monetary policy with mean squared gapsNorges Bank, March 2005

Main Lower HigherMain Lower Higher

0,0

2,0

4,0

6,0

8,0

02 03 04 05 06 07 08

Main

Low

High

0,0

0,5

1,0

1,5

2,0

0,0 0,5 1,0 1,5 2,0CPI-ATE

Out

put

0,0

1,0

2,0

3,0

02 03 04 05 06 07 08

-2,0

0,0

2,0

4,0

02 03 04 05 06 07 08

Alternative policy-rate pathsPercent, quarterly averages

Mean squared gaps

CPI-ATEAnnual percentage change

Output gapPercent

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