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    How should the new monetary policy be?

    Fatih Özatay, PhD22 September 2011 - Okunma Sayısı: 1183


    Risk-lover financial sector and asset price bubble had revealed that the “conventional” monetary policy will no longer be sufficient.

    Thanks to the Central Bank of Turkey (CBT), we have started to discuss to what degree the “conventional” monetary policy could solve the problems that emerged with the global crisis. I think this discussion was quite useful. What I mean by “conventional” monetary policy is the one that chiefly aims to secure price stability. The countries which implement inflation targeting regime specifically employ this type of monetary policy. The European Central Bank sticks to this type of policy although it does not have an inflation targeting regime and the Federal Reserve uses this policy to a large extent.

    The conventional monetary policy focuses solely on price stability, leaves financial stability in the hands of micro regulations and in times of crises or in periods in which banks hesitate from interbank operations steps in to support banks with the aim to prevent the liquidity crisis turn into a capital crisis via featuring financial stability. The institutions responsible for financial stability were usually not central banks. This was the case also with Turkey. It was argued that with a monetary policy that chiefly aims at price stability, level of production would approach the potential level of production, that is, the production gap would be rather small. Moreover, it was assumed that such monetary policy would be useful also for low-income people incomes of who did not increase as much as the inflation and who therefore failed to maintain their purchasing power. This perspective has reduced inflation to low levels throughout the world. Latin American countries that were used to live with three-digit inflation rates achieved single-digit inflation figures. In short, the “conventional” monetary policy succeeded in tackling inflation.

    The global crisis has revealed how risky the transactions the financial institutions in developed countries could be. Those risky transactions in the end had hit the world in form of a crisis which still continues. Those risky transactions had created an asset bubble which triggered and which was triggered by mentioned risky transactions. These two phenomena (risk-lover financial sector and asset price bubble) had revealed that the “conventional” monetary policy will no longer be sufficient. For some time now, economists have been puzzling their brains to figure out a new monetary policy framework that regards financial stability as much as price stability. Some circles accuse the CBT of going beyond the limits of inflation targeting regime with its recent steps. This, however, was the aim of the CBT to begin with: to go beyond the limits of the “ordinary” monetary policy. With this perspective, the CBT is among the pioneers, if not the leader, for it took action taking the relevant debates into account. Let aside the critics we have heard until today, which I believe were right by the way, the CBT must be congratulated for its leading position. On Tuesday a report that reflects the common views of sixteen renowned academics and policy implementers was published. The report is titled: Rethinking Central Banking and is accessible at Brookings Institute website (http://www.brookings. edu/reports/2011/09_ciepr_ central_banking.aspx).


    This commentary was published in Radikal daily on 22.09.2011