Personally, I think this is quite natural, as it is clearly difficult for a central bank to even attain its traditional objectives of price stability and macroeconomic stability under such circumstances. Trying to uphold financial stability then becomes a way of attaining the traditional monetary policy objectives. Many people believe that to achieve this it is necessary for the central banks to play an important role in the emerging macroprudential policy field. Another conclusion is that the central banks’ toolboxes should be expanded to include tools that can be used once a crisis has occurred and the policy rate has been cut as far as it can, that is, tools of the type used in the crisis should be made into a more permanent part of the monetary policy toolbox, although they hopefully will not need to be used too often. If this is done, it will mean that the central banks’ operational frameworks after the crisis will become both slightly more flexible and slightly more complex than they were before. One might say that we are going from a situation with one instrument and a relatively straightforward and clear objective, to a situation with several instruments and a more multifaceted objective. This sounds quite logical and natural to my ears, given what has happened in recent years, and I believe that this is the direction in which we are headed. But as I mentioned in my discussion of independence, there are some problems that need to be resolved along the way.
This development has caused some analysts to talk about “the missing deflation”.5 The so-called Phillips curve, which shows the relationship between the rate of inflation and economic activity, appears to have flattened compared with before.6 One possible explanation for this development is that the monetary policy conducted in recent decades around the world – where independent central banks have primarily focussed on attaining low and stable inflation – has gradually succeeded in anchoring inflation and inflation expectations. This has meant that the Phillips curve has stabilised in a situation with low average inflation. It is not entirely clear why this would also have contributed to reducing the slope of the Phillips curve, but we cannot rule out the possibility that if expectations are anchored better, price-setting and wage formation will be less sensitive to changes in economic activity. So, even if a monetary policy aimed at keeping inflation low and stable was perhaps not the main explanation for the Great Moderation, it is possible that it made an enduring impression in the form of a flatter Phillips curve. We cannot know whether this phenomenon is temporary or permanent. But if it is the case that we have had a fundamental change in the way the economy functions, it is also possible that this should lead to the central bank adapting, at least to some extent, the policy it conducts. A flatter Phillips curve implies that inflation has become less sensitive to the domestic demand situation – that it varies less with cyclical phases.