After 100 years of inflation targeting, it appears that monetary policy has failed to normalized the economy. However, contemporary economists have argued that we should generate inflation and embrace growth. What then is the role of Central Banks.
The https://en.wikipedia.org/wiki/Chicago_plan makes sense, also today.
for this purpose we can analyse and compare the outcomes/consequences of earlier theories and modern economic theories on economic growth, employment and other suitable indicators..
The Money-System has a central bias. The first Money was given to People to replace the barter Transaction. The first "Banking System" gave for example 10 People each 100 moneypoints (coins ore whatever) and said, give me 105 back. But in the whole System was only 10x100 so someone allways loose, because it is never enough that everybody can pai his rate of interest. The answer was to "build more Money". After we build to much coins, we build papermoney, after Building too much paper Money we built virtual Money and so on... the central Banks are the builders...
The role of central banking need to encompass a bigger role than just monitoring price inflation and setting interest rates. Monetary policy is only one of many policies to promote economic growth. Promoting financial development, efficient functioning of credit markets, optimal use of reserves and ensuring that exchange rate, inflation and interest rates are aligned to promoting economic growth in the long-run are equally important functions of central banking. In today's world of cryptocurrency and alternative payment platform, what is the role of the central bank? More often than not, the US Fed Reserve role is highlighted when changing the Fed funds rate. Financial markets react to such changes or perceived changes during this period and the impression is that, this is the most important role of the Fed or central banking because of the publicity. Other central banks have changed their interest rates without such fanfare. In a way, keeping the interest rates unchanged without tinkering with it on a monthly basis, may be a good alternative without bringing unwarranted attention.
@ Chung, interestingly, the erosion in the international financial market makes its in possible forr this channels to stimulate the economy. Thus, monetary policy failed to act as conservative mechanism.
Yes to some extent. We have alternatives now, dis-intermediation is on- going. To what extent has the central bank complete control over the monetary system? Will the goods market without a central bank. Look at Hong Kong and you can compare the role of a full-fledged central bank with a currency board system.
@Chung, I understand were you are going. Still, using the monetary base as remedy might not work. The exogenous shocks on the system is greater than the internal generated one. Likewise, the unified monetary ties place a benchmark on the nominal rate and the national central bank lack credibility to protect the system. Hence, given the fixed exchange rate regime been practises. The distributed shocks from the external factors are obvious.
Agree with your views. Those earlier theories focus a lot on closed economy. Only the Mundell-Flemming models throw some light into an open economy. In a globalized economy and world environment, those earlier theories need a tweek, as the environment becomes more complicated.
Christian Jost The interplay of private commercial banks and central banking is essential, i.e. the expansion of the monetary volume by the fiat credit of private banking can create an economic mega-condition, which the 'central monetary police' can no more handle by 'statistical computerpower'.
https://en.wikipedia.org/wiki/Minsky_moment
Just suppose that much of received doctrine is wrong. That is how one goes about making progress. There could be links between monetary aggregates and inflation. It could be that people have just looked for these links incorrectly. As one begins to build a new theory, one would hope that it admits to relatively straightforward testing.
Early theories did not take in account the current economic circumstances, such as rapid internationalization and shift from labor intensive to tech-intensive & K-economies. Early theories have been reasonably failed in the start of 21st century where we faced the global economic recession/depression especially in EU , other irregularities being constant. Hence, new economic models/theories are now required to handle the current era economic situations.
Theories are good for connecting a few important variables together. Some of these links may have worked differently when the environment changes. Testing a theory needs to be updated with the availability of techniques and statistical computing power.
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