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The Art of Monetary Policy

By Advisor Perspectives
Capital Markets, Financial Services

SUMMARY

  • The scientific approach to monetary policy, including a macroeconomic framework for analyzing inflation targeting and interest rate rules, has been very influential over the past 20 years.
  • In the wake of the financial crisis, however, quantitative easing and important structural changes in the economy have made the traditional science of monetary policy somewhat less useful for policymakers.
  • Until the scientific approach adapts to these changes, policymakers will likely have to rely less on models and simple policy rules and become more “artistic” in reading and responding to economic and financial signals.

Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time.

— John Maynard Keynes, letter to Roy Harrod, 4 July 1938

Read more at Advisor Perspectives.

Photo: David Low

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