Recently Claudio Borio of the BIS gave this speech in London questioning if central banks may need to rethink their approach to monetary policy going forward. The speech was at an OMFIF city lecture meeting. Below is the concluding paragraph of the speech.
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"To conclude, today I have put forward two hypotheses and drawn one implication. First, we may be underestimating the influence that real factors have on inflation, even over long horizons. Here I highlighted the role of globalisation, but noted that technology may well play a bigger one in the future. Second, we may be underestimating the influence of monetary policy on real (inflation-adjusted) interest rates over similar horizons. Here I highlighted the limitations of current empirical approaches that support the prevailing view and have provided some new evidence. Third, if so, we may need to adjust monetary policy frameworks accordingly. Here I highlighted the desirability of greater tolerance for deviations of inflation from point targets while putting more weight on financial stability.
I am fully aware that one can read the empirical evidence in many ways. My remarks have been intentionally provocative. But I do believe that, while the answers we may give can be very different, the future of central banking, and monetary policy more specifically, depends on them."
Click here for the full text of the speech
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Added note: Larry Kudlow issues this Twitter comment on a new report from the Cato Institute that calls into question the validity of the Phillips curve used by central banks to guide them in monetary policy decisions. Claudio Boris also discusses the Phillips curve in this speech. Jim Rickards has also said the Phillips curve is an example of a flawed model used by central banks that misleads them into making bad policy decisions.
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