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.
Here, the latest development on sovereign debt crises in Europe underscores the importance of the restoration of our fiscal discipline. If there are no changes in our policy, the ratio of public debt to GDP will increase to over 60 percent by 2012. This will not only leave little room for the government to use more fiscal stimulus should there be a new crisis in the region or in the global economy but it could also put Thailand in the spotlight of the foreign investors who have become much more sensitive to the issue of fiscal sustainability. This is why we have to rethink the stance of our fiscal policy once the short-term political and economic uncertainties fade away. Furthermore, to ensure fiscal sustainability over the medium to longer term, Thailand will need fiscal reforms that include: •  Continued fiscal consolidation;  •  Broadening of our tax bases;  •  Reforms to increase the efficiency and equality of the tax system; and  •  Greater allocation of public spending toward investment expenditures. Indeed, the government realizes the need for fiscal consolidation and reforms. With the better-than-expected tax revenues, thanks to the solid economic recovery, the budget deficit for this fiscal year and the extent of public debt will probably be lower than originally expected. The government has also taken initiatives to work on some reform measures such as the introduction of property taxes. These are commendable initiatives that remain to be seen whether will be successfully implemented.