Olivier Blanchard just released his thoughts on the recent “Rethinking Macroeconomics” seminar at the IMF. This paragraph caught my attention:
By implication, there is no agreement on how or even whether to integrate financial stability and macro stability in the mandate of central banks. Does it require a tweak to inflation targeting, or much more radical rethinking? The intellectually pleasant position is to argue that macroprudential tools will take care of financial stability, so monetary policy can still focus on its usual business— inflation targeting. I read, perhaps unfairly, Michael Woodford’s discussion at this conference to suggest that the crisis should lead us to shift from inflation targeting to nominal income targeting, without a major emphasis on financial stability. I am skeptical that this is the right answer. I think we have to be realistic about the role that macroprudential tools can play, and that monetary policy cannot ignore financial stability.
First it was the inflation-unemployment trade-off (or dilemma), then the variance of inflation-real growth variance trade-off. Now they want interest rates to take simultaneous ‘care’ (i.e. optimize) inflation, growth and financial stability (a ‘trilemma’)! Why ‘complicate’? Maybe because it gives rise to more papers!
It seems Mike Woodfords suggestion is to the point. Shift to NGDP targeting (level targeting) to ‘relive’ the 1987-07 period of nominal stability and develop macroprudential tools that help restrain financial ‘exuberance’. Two objectives – nominal stability and financial stability – and two instruments – monetary policy and macroprudential policy. As Tinbergen would say: “Obvious my dear Watson”.