{ "title": "The Evolution of Monetary Policy: More Art and Less Science", "publication": "IMF Blog, April 7, 2014", "sourceUrl": "https://www.imf.org/en/blogs/articles/2014/04/07/the-evolution-of-monetary-policy-more-art-and-less-science", "canonical": "https://www.imf.org/en/blogs/articles/2014/04/07/the-evolution-of-monetary-policy-more-art-and-less-science", "overlayPath": "/en/blogs/articles/2014/04/07/the-evolution-of-monetary-policy-more-art-and-less-science/index.md", "summary": "Authors: Giovanni Dell’Ariccia, Karl Habermeier", "sections": [ { "heading": "Overview", "content": "- Authors: Giovanni Dell’Ariccia, Karl Habermeier\n- Date: April 7, 2014\n- Context: Post-global financial crisis reassessment of monetary policy; conference on April 13 during the Spring Meetings of the World Bank and IMF." }, { "heading": "Key observations from the review", "content": "- The global financial crisis disrupted a long-standing monetary policy routine characterized by:\n - \"Simply keep inflation low and stable, target a short-term interest rate, and regulate and supervise financial institutions.\"\n - Success attributed to Paul Volcker’s Fed beating inflation in the United States in the early 1980s and over 20 years of “Great Moderation” — low inflation and output volatility.\n- Ideas once marginal before the crisis have moved to center stage, with a \"vast volume of new work by academics and central banks in just the last two or three years.\"\n- Monetary policy going forward: \"more art and less science\" — greater uncertainty about decision rules and transmission mechanisms." }, { "heading": "Objectives: price stability and financial stability", "content": "- Primary finding:\n - \"Long-term price stability has been a primary objective of monetary policy\" and the review \"found no good reason why this should change.\"\n - Benefits: makes planning easier for households and businesses; allows the economy to operate efficiently.\n- Crisis lesson:\n - \"Dangerous financial imbalances can brew under the apparently tranquil surface of low and stable inflation.\"\n - Traditional prudential policy focusing on stability of individual banks proved inadequate for system-wide risks.\n- Policy implications and recommendations:\n - \"Macroeconomic policy needs to pay greater attention to financial stability.\"\n - First line of defense should be instruments targeting financial stability more directly and efficiently, including:\n - Macroprudential tools, such as loan-to-value and debt-to-income limits.\n - Capital flow management measures.\n - Acknowledge limits: \"when these tools prove insufficient, we may have to accept a new tradeoff for monetary policy, and the interest rate may have to lend a hand to maintain financial stability.\"\n - Political tradeoff example highlighted rhetorically: \"Would you put two million people out of work because banks are too leveraged or house prices are rising too fast?\"" }, { "heading": "Policy decision rules: changed structure and uncertainty", "content": "- Structural changes:\n - \"Tectonic shifts in the structure and regulation of the financial sector\" during the crisis have altered monetary policy transmission.\n - The short-run relationship between inflation and unemployment \"seems to have changed.\"\n- Consequences:\n - \"The details of how the central bank can best achieve its objectives are probably not the same as before the crisis.\"\n - \"We still have a lot to learn about how things have changed and by how much.\"\n - For the foreseeable future, monetary policy will require greater judgment: \"more art and less science.\"\n- Political economy risk:\n - \"A less mechanical and predictable monetary policy may be more exposed to political interference.\"" }, { "heading": "Central bank independence: challenges under an expanded mandate", "content": "- Historical role:\n - Independence has been helpful to maintain price stability; analogy: Ulysses tied to the mast to resist sirens.\n - A simple and measurable mandate enables accountability and makes independence politically feasible.\n- Two central questions explored:\n - Can independence be extended to cover financial stability?\n - Can central banks retain independence for price stability if there is greater government oversight over financial stability?\n- Assessment:\n - The answer to the first question \"is not clear.\"\n - Financial stability is \"far more difficult to measure than inflation,\" and actions would often have clearer winners and losers than interest rate policy, complicating accountability and creating political challenges.\n - Institutional arrangements vary across countries:\n - Central bank leads financial stability policies in some countries (Singapore, United Kingdom).\n - Ministry of finance is ultimately in charge in others (United States).\n - \"So far, there are no final answers on what works best.\"" }, { "heading": "Parting thoughts and outlook", "content": "- Near-term expectations:\n - Only some questions will be settled in the short term; many require years of experience and observation.\n - Policymakers will need to make decisions on new policies and institutional arrangements \"often under great uncertainty.\"\n- Bottom line: \"The art of central banking is alive and well.\"\n\nThe Evolution of Monetary Policy: More Art and Less Science — Giovanni Dell’Ariccia, Karl Habermeier, April 7, 2014.\n\n---\n\n Content in this bundle\n\n- Staff Discussion Note\n - Staff Discussion Note (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Staff Discussion Note (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/blogs/articles/2014/04/07/the-evolution-of-monetary-policy-more-art-and-less-science" } ], "bullets": [ "[Markdown version](/en/blogs/articles/2014/04/07/the-evolution-of-monetary-policy-more-art-and-less-science/index.md)", "[Structured JSON version](/en/blogs/articles/2014/04/07/the-evolution-of-monetary-policy-more-art-and-less-science/index.json)", "[Bundle manifest](/en/blogs/articles/2014/04/07/the-evolution-of-monetary-policy-more-art-and-less-science/bundle-manifest.json)", "Authors: Giovanni DellAriccia, Karl Habermeier", "Published: April 7, 2014", "Authors: Giovanni Dell’Ariccia, Karl Habermeier", "Date: April 7, 2014", "Context: Post-global financial crisis reassessment of monetary policy; conference on April 13 during the Spring Meetings of the World Bank and IMF.", "The global financial crisis disrupted a long-standing monetary policy routine characterized by:", "Ideas once marginal before the crisis have moved to center stage, with a \"vast volume of new work by academics and central banks in just the last two or three years.\"", "Monetary policy going forward: \"more art and less science\" — greater uncertainty about decision rules and transmission mechanisms.", "Primary finding:", "Crisis lesson:", "Policy implications and recommendations:", "Structural changes:", "Consequences:", "Political economy risk:", "Historical role:", "Two central questions explored:", "Assessment:", "Near-term expectations:", "Bottom line: \"The art of central banking is alive and well.\"", "**Staff Discussion Note**" ], "related": [ { "title": "Staff Discussion Note", "role": "note", "sourceUrl": "http://www.imf.org/external/pubs/ft/sdn/2014/sdn1403.pdf", "summary": { "path": "/external/pubs/ft/sdn/2014/sdn1403.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/external/pubs/ft/sdn/2014/sdn1403.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/blogs/articles/2014/04/07/the-evolution-of-monetary-policy-more-art-and-less-science/index.md", "json": "/en/blogs/articles/2014/04/07/the-evolution-of-monetary-policy-more-art-and-less-science/index.json", "bundleManifest": "/en/blogs/articles/2014/04/07/the-evolution-of-monetary-policy-more-art-and-less-science/bundle-manifest.json" }, "generatedAtUtc": "2026-08-28T03:41:20.745Z" }