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Should monetary policy \"lean or clean\"?

William R. White

No 34, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: It has been contended by many in the central banking community that monetary policy would not be effective in \"leaning\" against the upswing of a credit cycle (the boom) but that lower interest rates would be effective in \"cleaning\" up (the bust) afterwards. In this paper, these two propositions (can't lean, but can clean) are examined and found seriously deficient. In particular, it is contended in this paper that monetary policies designed solely to deal with short term problems of insufficient demand could make medium term problems worse by encouraging a buildup of debt that cannot be sustained over time. The conclusion reached is that monetary policy should be more focused on \"preemptive tightening\" to moderate credit bubbles than on \"preemptive easing\" to deal with the after effects. There is a need for a new macrofinancial stability framework that would use both regulatory and monetary instruments to resist credit bubbles and thus promote sustainable economic growth over time.

JEL-codes: E5 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: Published as: White, William R. (2009), "Should Monetary Policy Lean or Clean: A Reassessment," Central Banking 19 (4): 32-42.
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