Central Banks as Economic Institutions Roundtable Debate

In a world with floating exchange rates, international coordination between national central banks (NCBs) for normal (non- crisis) monetary policy purposes is, for all practical purposes, redundant. Co-ordination between NCBs could make sense if monetary policy were an effective instrument for fine-tuning the business cycle. However, the lingering belief in the effectiveness of monetary policy as a cyclical stabilisation instrument is, in my view, evidence of the ‘fine tuning illusion’ or ‘fine tuning fallacy’ at work. In a world with unrestricted international mobility of financial capital, monetary policy, working directly through short nominal interest rates and indirectly through other financial and real asset returns and through asset prices, including the exchange rate, is no longer a useful instrument for activist policy aimed at fine tuning the national or global business cycle.