Taken to its limit, the argument that monetary policy can be used to expand demand with little or no implications for inflation challenges the consensus that the best contribution that monetary policy can make to the long-term health and prosperity of the economy is to deliver price stability. That consensus is based on painful experience that monetary policy can’t affect the level of output in the long run. That we can’t generate permanently higher output and permanently higher employment simply by printing more money.9 We should be nervous about how quickly we overturn that consensus. Conclusion and summary Let me conclude. The financial crisis has thrust the rather reserved world of central banking and monetary policy into the spotlight. That is both understandable and healthy. Monetary policy failed to prevent the financial crisis. And in many countries, including the UK, it has failed to stimulate the growth that we all long to see. It’s only right that inflation targeting – the dominant paradigm governing the operation of monetary policy in much of the industrialised world – should be questioned and challenged. And to my mind it has a good story to tell. The inflation target ensures that the primary objective of monetary policy is to deliver price stability. But it affords the flexibility that it can be operated in such a way as to support output and employment.
McCafferty, Ian (2013), “Monetary policy in a changing economy”, speech given at Bloomberg, London, available at: http://www.bankofengland.co.uk/publications/Pages/speeches/2013/627.aspx Monetary Policy Committee (2013), February 2013 Inflation Report, available at: http://www.bankofengland.co.uk/monetarypolicy/Pages/framework/framework.aspx Monetary Policy Committee (2013), Minutes of the February 2013 MPC meeting, available at: http://www.bankofengland.co.uk/publications/minutes/Pages/mpc/default.aspx Oulton, N and Sebastía-Barriel, M (2013), “Long and short-term effects of the financial crisis on labour productivity, capital and output”. Bank of England Working Paper no. 470 and Centre for Economic Performance, Discussion Paper no. 1185. Available at: http://www.bankofengland.co.uk/publications/Documents/workingpapers/wp470.pdf Tucker, Paul (2012): “Competition, the pressure for returns, and stability”, speech given at the British Bankers’ Association Annual Banking Conference, London, available at: http://www.bankofengland.co.uk/publications/Pages/speeches/2012/611.aspx  8  BIS central bankers’ speeches  Annex: Charts  BIS central bankers’ speeches  9