Central Banks’ Objective Policies in Perspective

Initially mainly dedicated to financial stability tasks, central banks did not develop their macroeconomic steering role until after the Second World War. The 1973 collapse of the Bretton Wood system led them to replace the loss of external monetary anchoring with domestic objectives, first targeted at monetary aggregates and then, from the 1980s onwards, at inflation. Through a process of experimentation-imitation, inflation targeting has become widespread in most OECD countries and in many emerging countries. However, the 2008 crisis sparked a wide-ranging debate on the validity of such a strategy in a low-inflation environment. The paper presents counterfactual simulations of alternative options for nominal GDP and the price level. While these options have advantages, for example in terms of the responsiveness of monetary policy in turbulent times, they do not invalidate flexible inflation targeting policies as practiced in large currency areas. The crisis has also put financial stability tasks back at the heart of central banks’ concerns, raising three questions related to their scope of competence, its compatibility with their independence status and the interactions between their monetary and prudential functions.