Fed Chair Bernanke: Crisis Is Changing Central Banking
The overall framework that guides monetary policy remains largely in place after the financial crisis and recession. But central banks the world over have broadened the specific tools they use to implement policy, Federal Reserve Chairman Ben Bernanke said in an October 18 speech.
At an economic conference at the Federal Reserve Bank of Boston, Bernanke delivered an address titled "The Effects of the Great Recession on Central Bank Doctrine and Practice." Bernanke set the stage for his analysis by explaining that in the two decades before the crisis, central bankers and academics largely reached a consensus on the intellectual and institutional framework for monetary policy. This consensus policy framework, Bernanke said, is based on a commitment to medium-term price stability and transparency regarding central banks' policy objectives and economic forecasts.
Increasing transparency a major goal
The financial crisis made transparency more important because with interest rates near zero, "influencing the public's expectations about future policy actions became a critical tool," the Fed chairman said. "The commitment to a policy framework that is transparent about objectives and forecasts was helpful, in many instances, in managing those expectations and thus in making monetary policy both more predictable and more effective during the past few years than it might otherwise have been."
Financial crisis raised big questions
"My guess is that the current framework for monetary policy—with innovations, no doubt, to further improve the ability of central banks to communicate with the public—will remain the standard approach, as its benefits in terms of macroeconomic stabilization have been demonstrated," Bernanke said. "However, central banks are also heeding the broader lesson, that the maintenance of financial stability is an equally critical responsibility."
October 26, 2011