Financial Stability, Monetarism and the Wicksell Connection

David Laidler ()

No 20073, University of Western Ontario, RBC Financial Group Economic Policy Research Institute Working Papers from University of Western Ontario, RBC Financial Group Economic Policy Research Institute

Abstract: In today's discussions of central banking, maintaining macro-financial stability has only recently appeared along-side the pursuit of low inflation as an important policy goal. This is in strong contrast to the earlier literature, where financial stability was often the main concern of the theory of central banking. This theme is explored here first from the point of view of the monetarist tradition, which treated an excess demand for money which the central bank in its capacity as lender of last resort had an obligation to relieve as a central feature of financial crises; and then from that of a later Wicksellian tradition, where co-ordination failures in the inter-temporal allocation of resources that it was monetary policy's task to avoid, were emphasized. Though there are no long-lost sure cures for financial instability awaiting discovery in the older literature, its emphasis on the potential for markets to fail to clear provides a helpful perspective on the phenomenon, often missing from modern models of the conduct of monetary policy.

Keywords: financial stability; financial instability; crises; co-ordination failure; lender of last resort; inflation; monetarism; forced saving; Wicksell (search for similar items in EconPapers)
JEL-codes: B13 B22 E31 E32 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-hpe, nep-mac, nep-mon and nep-pke
Date: 2007

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