Central bankers must update outdated analytical toolkit
October 20, 2011
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Gillian Tett has a nice post in today’s FT where she refers to two recent BIS Working Papers by Claudio Borio, that deals with the need for new tools and policies by central banks, post-crisis. Borio notes that “the mainstream analytical frameworks at policymakers’ disposal are inadequate”, and echoes the earlier Brookings report on the need for a new paradigm for central banking. This will require, according to Borio, “bolder steps bolder steps to develop analytical frameworks in which monetary factors play a core role, not a peripheral one as hitherto – an intellectual rediscovery of the roots of monetary economics.” At the same time, it is advisable to lower expectations of what central banks can do, given the limited toolbox available. Promising too much with the new macro prudential tools could set the new framework up for failure. And the current crisis is also hard to mend with its huge balance sheet dislocation. — When you are at it, read also his earlier WP on the Savings Glut, and especially the short annex which gives the theoretical background for his analysis.