With economies stagnant and interest rates near zero, central banks are trying new ways to induce banks to lend and companies to borrow. Promoting financial stability and restarting growth are the priorities, not inflation control. This creates two major problems. First, economic theory is lacking, but it is difficult to move cautiously given the relentless clamour for policies to promote growth. The second problem is how to coordinate monetary and financial policy.
In Britain, the current separation of the Monetary Policy Committee and Financial Policy Committee risks policy gaps and inconsistencies. But it is not too late to change this situation, by creating a single, accountable Monetary and Financial Policy Committee, with a solid quotient of external members and a dual mandate for inflation control and financial stability. Continue reading »