Hence, macroprudential policies need to play a very important role. But what a central bank can or cannot do is and will remain an interesting topic of debate. It now seems beyond all doubt that the “inflation first” approach may become counterproductive in an environment of financial instability, which would rather call for preserving a certain tactical flexibility in conducting the monetary policy. Over the medium and long term, failure to maintain financial stability may only lead to a renewed flare-up in inflation. This reminds me of standard aircraft safety instructions, according to which, in case of cabin depressurization, the parent should put the oxygen mask on his own face and only afterwards tend to the child (who, in most cases, is the parent’s reason to live). While looking at long-term price stability as its fundamental objective, the central bank needs to keep a close eye on financial stability and, I would add, on the overall developments in macroeconomic indicators. Otherwise, disinflationary gains – however spectacular they might seem at a given point in time – would become utterly unsustainable. 6. The adequate level of inflation: “low and stable” vs. “moderate and stable”  The present crisis brought forward for discussion not only the primary objectives of the monetary policy I have already referred to, but also the adequate level of such objectives. Apart from semi-accepting the idea that financial stability must be a monetary policy objective, economists have also called into question the inflation level that must be targeted. Recently, Blanchard et al.
The last three topics are especially relevant in the context of the financial crisis, referring to the consequences of having a majority foreign-owned banking system, the rethinking of central bank objectives with special attention paid to financial stability and, finally, the choice of the optimal inflation target. 1. From monetary anchors to inflation targeting  During the nineties, giving up the intermediate objective as an anti-inflationary anchor in favor of direct inflation targeting marked a major change in the way of thinking the monetary policy framework around the world. BIS central bankers’ speeches  1  Monetary strategies based on a nominal anchor, be it the exchange rate or a monetary aggregate, still prevailed in the early nineties. While exchange rate pegs are currently still in place in some countries (and I will come back to this later), monetary targeting slid into oblivion. But, at the time when the National Bank of Romania had to choose a strategy for conducting its monetary policy, monetary targeting was not yet out of fashion. Moreover, this strategy was adopted and implemented in the context of the stand-by arrangements signed by the Romanian authorities with the IMF, which stipulated the monitoring of monetary aggregates developments. The same as with fiscal and income policies and with structural reforms, the programs agreed upon with the IMF were a strong anchor for coherent policies in the nineties. Another reason for choosing monetary targeting was that the alternative strategy, i.e.