October 06, 2016

Central bankers need new tools

Vivek Dehejia, Resident Senior Fellow, highlights in this Livemint article how Central Banks are today vested with many more objectives than before.


The Tinbergen principle states that a policymaker generally needs at least as many instruments as she has objectives to be successful. The immediate implication for our problem at hand is that to achieve the multiple objectives of (let us say) a stable inflation rate and avoiding asset price bubbles from getting out of control, a policymaker will need minimally two instruments: the policy interest rate, for the first objective; and another instrument, such as the power to regulate or otherwise dissuade speculative purchases. While Mundell proposes a world currency to stabilise the system overwhelmed currently by Unconventional Monetary Policies (UMPs), Vivek and James W. Dean propose, "Rather, a more salutary short-term focus might be on fostering genuine international cooperation, even coordination, not of monetary policy per se, which is likely to be impractical, but of, for instance, short-term capital flows, an idea to which even the IMF appears to be amenable."


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