Why the Monetary Policy Framework in Advanced Countries Needs Fundamental Reform

This paper was published on 3 August 2023 by INET as  Working Paper No 210. It is argued in the paper that monetary policy should be guided much more by financial sector developments (credit and debt) and much less by near term targets for inflation. This argument is first supported by an empirical review of the negative outcomes produced by the inflation targeting framework. In particular, it has led to financial bubbles that have created ever larger bubbles that now seriously threaten future growth prospects. Second, support is provided through questioning the need for and the effectiveness of easy money  (deemed necessary by the inflation targeting framework) and through pointing out its many unintended  consequences. The search for an alternative monetary policy framework would begin with the observation that an economy is a complex, adaptive system like many others in nature and society. From this perspective, arguments for introducing a “narrow money” regime need more attention.