Monetary Policy in Interdependent Economies: The Task Ahead

This chapter highlights on the challenges posed to central bank independence by the necessary unconventional measures undertaken and the new horizons open to central banks. Central bank independence is not incontestable, with its boundaries at times remaining blurred. It is vital to understand the practical problems and challenges so as to identify the proper boundaries of central bank independence and promote policies that best contribute to society’s welfare. A central bank regime to address a variety of contingencies cannot be designed absent a good fiscal constitution. Central bankers need to resist pressures to encroach too far into fiscal territory, which is bound to become evident during the emergence of the next recession arrives. The basic concern of the central bank in deciding on an appropriate stance for monetary policy is to do what it can to assure financial conditions conducive to high employment and low inflation in the months and years ahead. Even though increased uncertainties about the accuracy and stability of macroeconometric models give credit to a less active policy, agreement is absent about the best way to carry out policymaking responsibilities.