Towards an activist monetary policy: Challenges for central banking in the post-crisis era

Abstract

The history of monetary thought has been an area of debates within the spectrum of the minimalism-activism in terms of both the objectives and tools of monetary policy. The minimalist approach based on the single objective-single instrument framework before the global financial crisis had a set of objectives and tools suitable for the traditional business cycle. A key lesson from the crisis is that price stability is not enough to achieve financial stability. The crucial role of financial stability to ensure sound macroeconomic performance has led to the enlargement of the aims and tools of monetary policy to respond to the financial cycle. The crisis represents a new phase of transitions between minimalist and activist monetary policy approaches regarding the historical evolution of monetary regimes. Nevertheless, the new monetary regime has not emerged yet. This chapter aims to reveal the new challenges posed by the activist approach for central banking in the post-crisis era.