Avoiding this obvious pitfall is a very important contribution which monetary policy can make, at the same time helping to ensure fair returns to savers and combating the deterioration in the national saving rate. What monetary policy cannot do Unrealistic expectations regarding what monetary policy can do abound.
While monetary policy can contain inflation, reduce inflation risk and uncertainty premia in the economy, ease the cash flow of borrowers once interest rates have adjusted to the low-inflation environment, and contribute towards sound factor allocation, it cannot do any of these things overnight. Allowance should be made for long and variable lags in the operation of monetary policy.