Milton Friedman’s famous k-percent money growth rule is one example, as are Taylor-type rules for the setting of the interest rate instrument. Unfortunately, over the past few years, the combination of a financial crisis and sustained fiscal imbalances has led to a breakdown in the institutional framework and the previously accepted barriers between monetary and fiscal policies. The pressure has come from both sides.
Governments are pushing central banks to exceed their monetary boundaries, and central banks are stepping into areas not previously viewed as appropriate for an independent central bank. Let me offer a couple of examples to illustrate these pressures.