As a result, questions about the role of monetary policy and the independence and accountability of central banks, once confined to rarefied academic discussions, are fixtures of broad policy debate. But, rather than try to define a single approach, central bankers should aim to develop individualized approaches within the orthodox monetary policy framework, which revolves around price stability and independence.

Monetary policy and institutions

What China really needs is a truly independent monetary policy oriented to domestic objectives. This would enable the PBC to manage domestic demand by allowing interest rates to rise in order to rein in credit growth and deter reckless investment.

China s Monetary Policy Surprise

China s Monetary Policy Choice

Set the IMF Free

Shinzo Abe s Monetary Policy Delusions

It is time to adjust monetary policy.

What Monetary Policy Does China Need?

A single monetary policy for a currency area comprising 11 and later 12 countries, each with a sovereign national government, was something entirely new. Would it be compatible with autonomous national fiscal policies?

1. Strongly anti inflationary monetary policy.

Typically, monetary policy is one of the policy tools for managing the balance of payments.

Why is Monetary Policy Underrated?

Is US Monetary Policy Made in China?

The real reason why central bank independence tends to create a democratic deficit under a multi target monetary policy regime, and why it has become increasingly vulnerable, is that the two main arguments in favor of it no longer apply.

Moreover, unlike major developed economies, most of which have used up all of their conventional monetary policy ammunition by reducing their policy interest rates to zero, China has plenty of monetary stimulus on reserve to address cyclical disruptions. In these circumstances, it makes sense for China to lean more on monetary policy than on fiscal expansion.

But this was not a matter of good luck. The fundamentals of the euro s success are hard work, dedicated commitment to the common currency s unique historical mission, and, not least, a well chosen monetary policy strategy.

These exclusive affairs of State include external relations, defence policy and monetary policy.

25), in 2003, the International Monetary Fund (IMF) indicated the need for further enhancement of the supervisory and regulatory processes in the Territory.

In China, unlike in advanced countries, monetary and sterilization policy are often one in the same. The degree to which monetary policy is expansionary depends on the degree to which the liquidity created by currency market intervention has been sterilized.

The political temptation is always there to resort to inappropriate monetary expansions that bring temporary relief at the expense of harming longer term growth. Institutional independence has allowed the central bank to conduct its monetary policy in a consistent manner, insulated from short term political influences.

The territorial Executive shall be consulted with respect to decisions on monetary policy.

The International Monetary Fund continued to assist the Government, through a close policy dialogue, in maintaining macroeconomic stability, especially in the area of fiscal policy.

The IMF s Lending Overhaul

On the one hand, pegging local currencies to the dollar renders monetary policy completely ineffective, as in a fixed exchange rate regime.

The currency was in theory governed by a rules based Currency Board, which the British invented for their smaller colonies. It tied the local currency to the British Pound, giving local authorities no discretion in monetary policy.

The market had strongly expected adjustments to UK monetary policy.

Monetary policymakers, the argument goes, should be independent from the political system, because, when elections near, politicians will likely pressure them to buy temporarily higher employment at the cost of permanently higher inflation. To prevent this inefficient trade off, governments should tie central bankers hands by insulating them from political influence.

Contrary to those who regard the discussion of an alternative monetary framework as premature, there are good reasons for China to begin right now to build the institutional foundation for the transition to an independent monetary policy. Indeed, early adoption of a low inflation objective would help secure the monetary and financial stability that China needs as it allows greater exchange rate flexibility.

This requisite independence of the IMF staff can be achieved by stipulating that the Board oversees only the work of the Fund s analytical functions and, more importantly, that its composition and decision making mode are overhauled in the following ways

In addition, the single currency weakens the market signals that would otherwise warn a country that its fiscal deficits were becoming excessive. And when a country with excessive fiscal deficits needs to raise taxes and cut government spending, as Greece clearly does now, the resulting contraction of GDP and employment cannot be reduced by a devaluation that increases exports and reduces imports.

The second argument for institutional independence is that central banks have a clear comparative advantage in dealing with monetary issues, and can therefore be trusted to pursue their targets independently. But this advantage does not extend to other policy areas.

Political scientists talk about democratic delegation the idea that a sovereign might want to tie its hands (through international commitments or delegation to autonomous agencies) in order to achieve better outcomes. The delegation of monetary policy to an independent central bank is the archetypal example in the service of price stability, daily management of monetary policy is insulated from politics.

Yet widespread concerns persist. The International Monetary Fund for example, has argued that any rate hike by the Fed would need an effective monetary policy communication strategy a polite way of saying that any monetary tightening in the US and other advanced economies would be premature.

Still to be argued out within the guild of economists , Samuelson wrote in 1969, is the proper quantitative potency of monetary versus fiscal policy. This question eventually was resolved in favor of monetary policy.

In addition to becoming bolder and more expansive, it has become increasingly intertwined with fiscal policy. This is most explicit in Japan, where monetary policy is a central component of Prime Minister Shinzo Abe s economic strategy, dubbed Abenomics, implying collaboration between the government and the central bank.

The first step is to cut interest rates immediately, thereby reducing the burden on debtors and bolstering GDP growth. The government must also pursue a more active fiscal policy, rather than focusing on monetary policy.

Indeed, as the IMF has pointed out in its World Economic Outlook, these flows threaten to inflate asset bubbles, make it harder for countries to pursue an independent monetary policy, and trigger currency appreciation and associated losses in export competitiveness. Brazil s currency, for instance, appreciated more than 40 from 2009 until August 2011, before weakening in recent months.

We have tightened fiscal and monetary policies, and we are monitoring them very closely.

The fact is that, with a flexible exchange rate, a country can offset the recessionary impact of a neighboring country s monetary easing using its own independent monetary policy, guided by carefully chosen inflation targets. If all countries adopt this approach, the entire global economy benefits.

(g) International Monetary Fund The relevance of national policies to promote growth

The policy of the IMF was totally coherent, yet totally catastrophic.

In any case, the success of monetary policy is difficult to deny. As the deflation gap narrows, however, the overall impact of monetary policy will weaken, as it increasingly influences prices more than output.

This simply reflects the reality of monetary policy interdependence if the US Federal Reserve s policy of so called quantitative easing weakens the dollar, others have to respond to prevent undue appreciation of their currencies. Someday, we might achieve closer global monetary policy coordination for now, however, it made sense for Japan to respond, albeit belatedly, to developments elsewhere.

In addition to short term policy headaches, stronger currencies carry potentially significant costs in terms of hollowing out industrial and service sectors. So, after a varying mix of tolerance and heterodox responses, officials are pulled into loosening their own monetary policy in order to weaken their countries currencies or, at a minimum, limit the pace of appreciation.