Monetary Policy Has Limits, but It Should Do Its Job

A blog about business and economics.
June 25 2012 12:47 PM

Monetary Policy Has Limits, but It Should Do Its Job

The Bank of International Settlements, a kind of global consortium of central banks, has a new report out on "the limits to monetary policy."

This, to me, is the same as the panacea canard. There are all kinds of things that monetary policy can't accomplish. The most important things in the world! But monetary policy has an unlimited ability to ensure a level of aggregate demand consistent with full employment. Monetary policy can, in other words, ensure that the market for labor clears. It can and it should.

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Because when monetary policy is creating a level of aggregate demand consistent with full employment, then economic policymakers can start concerning themselves with all the other things that monetary policy can't do. How do we expand the production possibility frontier? How do we generate economically sustainable growth? How do we boost living standards for the least fortunate? How do we help families buffet themselves against the whims of fortune? Great questions. But as long as monetary policymakers fail to deliver a level of aggregate demand consistent with full employment, politics becomes myopically focused on short-term labor market impacts rather than the foundations for long-term prosperity.

Central bankers need to start spending less time making excuses for themselves and more time doing their jobs.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.