Consider a statement by Lars Svensson, whom I have chosen not only because he is one of the gurus of the concept of inflation targeting but also because his statement shows how you can immunize a strategy against any critique.'In the end, my main conclusion so far from the crisis is that flexible inflation targeting, applied the right way and using all the information about financial factors that is relevant for the forecast of inflation and resource utilization at any horizon, remains the best-practice monetary policy before, during, and after the financial crisis.' His statement is that if it hasn't worked as you had expected, either it was not applied properly, or you missed some information. But the strategy was fine. In this way, you can continue with such concepts indefinitely, having made mistake after mistake.
However, cheering for the monetary pillar as a diagnostic tool for financial imbalances is ex post argumentation as well. The monetary pillar was always seen to detect medium- and long-run risks for price stability on the goods market in the spirit of the quantity theory (and the Bundesbank ). A lot of recent research shows that trend deviations of monetary aggregates and credit aggregates do a pretty good job in prediciting financial instability. Hence, the two-pillar strategy is likely to be appropriate in dealing with the bulid-up of imbalances and the corresponding build-up of medium-term risks for price stability. But its original purpose is a different one. ECB officials silently rededicated the monetary pillar towards ensuring financial stability.
