I submit the right question is: how can we coordinate fiscal and monetary policies to achieve the planned outcomes? Inflation targetting I will now move to the third issue – inflation targetting. In the years leading to the crisis, central bankers had nearly declared victory.
They had found the holy grail of stable growth, low inflation and low unemployment through a rule based monetary policy that targeted inflation rather than monetary aggregates. The much celebrated Great Moderation had delivered. The crisis at once hurt the central bankers’ pride and shattered their confidence as the Great Moderation unravelled. Monetary policy was found wanting in delivering financial stability.