Is inflation targeting dead? Central Banking After the Crisis - Vox

Introduction• Financial crises often require lender-of-last-resort interventions that create moralhazard and blur monetary and fiscal policy distinction (important for central-bankindependence); and• Financial crises can be massive economic shocks that make it harder for centralbankers to do their job.Many new policy tools to address financial stability have been developed since theCrisis.The first set of innovative tools for financial stability is known as macroprudentialpolicies. These are tools designed to deal directly with financial sector imbalances andvariations in risk. For example, Switzerland currently has both negative inflation and ahousing market approaching bubble territory in some regions. The Swiss central bank’sreaction has been to keep policy rates at zero but to tighten regulations on propertylinkedlending and restrict the use of personal retirement accounts for mortgage downpayments.Here the central bank uses two sets of tools to target two goals – price stabilityand financial stability. The banking and financial regulation reforms undertaken sincethe Crisis are also part of the toolkit. Another important tool is countercyclical capitalrequirements for banks, although depending on institutional structures, the pursuit ofsuch policies may not be the responsibility of the central bank. 3Loss of stability traction at the zero lower bound: New toolsContractions from the Global and Eurozone Crises soon drove policy rates to zero inmost mature economies (although not in the Eurozone). 4 As inflation is under controlbut GDP is still below – or barely back – to pre-Crisis levels in many countries,policymakers sought new, unconventional tools to supplement the simulative power ofpolicy rates. In addition, economies facing high levels of private and/or public debt are3 For an introduction to macroprudential rules, see Perotti (2012); see Agur and Sharma (2013) for a critique, and theECB’s Macro-prudential Research Network, for on-going work http://www.ecb.int/home/html/researcher_mars.en.html.4 For empirical evidence on this point, see Giannone, Lenza and Reichlin (2013).15