There is a widespread view that monetary policy has been fundamentally changed by the 2008 financial crisis. The IMF’s Chief Economist Olivier Blanchard says that ‘Monetary policy will never be the same’.
Policy certainly explored new areas in response to unusual circumstances, but when the dust settles, how different will it be? For some, the economy has fundamentally changed, and monetary policy has to adapt to the new world. For others, monetary policy itself has shown its deficiencies and needs to be made effective.
Answering the first group is straight-forward. Some economists have become so pessimistic about the intrinsic dynamism of mature economies that they foresee secular stagnation, with this pessimism sometimes extending to emerging economies as well. They argue that monetary policy should become accustomed to providing constant stimulus in the form of negative real (ie. inflation-adjusted) interest rates, to encourage investment and discourage saving.
While ageing demographics will produce low growth, it isn’t sensible to undertake investments which have such a low value to society that they can’t support a positive real interest rate. Any economy in this state has deeper problems. It may well be sensible for monetary policy to temporarily administer negative real interest rates during a recession, but this can’t be a sensible long-run policy setting.
What did the 2008 crisis reveal about the effectiveness of monetary policy?
Article prepared by Leon Dubois