Monetary Theory and Policy: The Implications of Radical Uncertainty

Ioanna Kokores

Chapter Chapter 7 in Monetary Policy in Interdependent Economies, 2023, pp 159-188 from Springer

Abstract: Abstract This chapter argues on the limited explanatory and forecasting ability of current monetary policy models and methods in view of radical uncertainty, with special reference to antecedent experience over the past century. Central banks realize that the large-scale asset purchases have uncomfortable fiscal and distributional consequences, in addition to the lack of clarity on the definition of price stability and the concerns about the legitimacy of large balance sheet expansions, which also foster inflationary consequences. The belief in a stable flat Phillips curve—tied to the policymakers’ belief in their own credibility of commitment to control inflation—helps explain why monetary policymakers failed to anticipate the current surge in inflation (even leaving aside the unforecastable war in Ukraine). As COVID-19 was not an ordinary business cycle downturn, it is certainly possible to debate the transmission mechanism between an increase in broad money and its impact on the resurgence of inflation. The assessment of economic slack given the recovery’s uncharted nature prolongs a considerable level of uncertainty. Prolonged supply disruptions, commodity and housing price shocks, longer-term expenditure commitments, and a de-anchoring of inflation expectations could lead to significantly higher inflation than predicted in the baseline.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:fimchp:978-3-031-41958-4_7

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DOI: 10.1007/978-3-031-41958-4_7

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