Monday, July 12, 2010

Jürgen Stark defends the Monetary Pillar (ls)

Read ECB Chief Economist Jürgen Stark's fierce defence of the Monetary Pillar here.

The most remarkable statements are (emphasis added):

Money has been ignored. In the canonical New Keynesian macro-model on which the intellectual foundations of inflation targeting rests, money has been considered a redundant element in the monetary transmission mechanism. At best, money is seen as a useless appendix to the model, serving only to confuse and distract any policy-maker misguided enough to consider it. Now that the financial crisis has exposed the fault lines underlying this model; now that it has been recognised that the inflation targeting approach focused unduly on short-term cyclical developments in the real economy;now that economists agree that insufficient attention has been paid to financial imbalances and vulnerabilities, critics of the ECB have acknowledged the benefits of monetary analysis. Yet, they tell us that we have pursued such analysis for the wrong purpose! The right purpose, they tell us, is to support a broader view of our mandate, paying more attention to risks to financial stability in formulating our policy decisions. It is a little bit as if they are telling us to forget about monetary policy in principle.