Wednesday, January 20, 2010

Monetary policy

John Plender makes that point that monetary policy was asymmetric.

The academics who dominate modern central banking were ideologically committed to the notion of efficient markets and to exclusive reliance on inflation targetting regardless of imbalances arising from easy credit and soaring asset prices – a spectacular case of one-club golfing. This mindset led to the silly belief that bubbles could not be identified at the time and that it was better to clean up after the bust than to lean pre-emptively against the wind in the boom. Monetary policy was thus asymmetric. Interest rates were reduced when asset prices fell, but were not raised in response to wildly overheating markets.

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