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H. Kent Baker and Leigh A. Riddick

Print publication date: 2012

Print ISBN-13: 9780199754656

Published to Oxford Scholarship Online: May 2013

DOI: 10.1093/acprof:oso/9780199754656.001.0001

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Central Banks and Economic Policy after the Crisis: What Have We Learned?

Central Banks and Economic Policy after the Crisis: What Have We Learned?

Chapter:
(p.95) 5 Central Banks and Economic Policy after the Crisis: What Have We Learned?
Source:
International Finance
Author(s):

ANDREW HUGHES HALLETT

GIOVANNI DI BARTOLOMEO

NICOLA ACOCELLA

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199754656.003.0005

The recent financial crisis has led to an unprecedented degree of policy activism by central banks and governments, institutions that rely in particular on detailed announcements of current and future policies; on the use of unconventional policy instruments; and on a close coordination of monetary and fiscal policies to contain risk, manage recovery, and manage exit strategy. This chapter provides a review of the conditions needed for policies of this type to work as well as conditions when unconventional policy instruments or fiscal-monetary packages will be necessary. The key lesson for central bank policy in the future lies in the management of expectations and interinstrument coordination, which justifies publishing interest rate forecasts, spending plans, and tax rate projections in advance. In those cases, policy announcements, if properly communicated, can be used to extend the impact of both conventional and, more importantly in this context, unconventional policy instruments. The chapter also illustrates how the conflict between the desire to achieve short-run results and the need to achieve a long-run sustainable recovery can be managed.

Keywords:   rational expectations, controllability, policy neutrality, monetary policy, fiscal policy

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