Will there be a ”new normal” in monetary policy any timesoon?
By Marko Škreb, 1 November 2018.
articles & speeches
Will there be a ”new normal” in monetary policy any timesoon?
Firstly, one would have to be more precise what is mentby normal in this context. By “normal” we usually considersome past “average” of what we were used to or what most of us perceive as normal in behaviour or dress code. Something we can focus on and rely as a kind of benchmark.
In economics and in monetary policy benchmarking is more difficult than in medicine or meteorology. There are a lot of reasons why standards in economics are more difficult (to be explained later). But it does not mean we do not have views on “normality” in economy. For european economies, especially EU members (and candidates for EU), Maastricth criteria are an attempt to have standards which can be considered normal macroeconomic numbers.
Yes, they are specific conditions for entering the Eurozone, but their importance is larger than the Euro itself. Before the Global Financial Crisis (GFC) most economists would agree what “normal” is. For example, most advanced economies would consider as “normal” inflation around 2%. The number was somewhat higher for emerging economies, but usually normality would be a single digit inflation.
For inflation around 2% nominal interest rates around 5-6% were considered “normal”. And there was a “normal way” of conducting monetary policy to achieve those values. It is called inflation targeting, which linked with central bank independence and indirect instruments of monetary policy were the standard.
From the 1980-ies until 2008 a lot of central banks switched or were planning or at least aiming to achieve this standard. So normality was, for central banks, to focus only on a single goal and price stability and inflation targeting were the best ways to achieve it. Economies were growing steadily and everything seemed to be “just right”. Some referred to it as “great moderation”. Others considered that ideally central banking should be “boring”. Flexible exchange rate, indirect instruments of monetary policy, deregulation and liberalization of financial markets were the way to run the economy and conduct monetary policy. Following dictums from the “Washington consensus” was recommended to almost all countries around the globe, from Australia to US, from Albania to Zimbabwe. But, GFC and its aftermath have destroyed this view. Central banking has changed and is still changing without clear direction how. The question therefore is what is the new normal and/or will there be a new normal if there is not one now, during rapid changes?
