Speech

Opening Remarks by the Managing Director at the Conference on “Monetary Policy in the New Normal”; April 13, 2014

April 13, 2014

As prepared for delivery

Do you remember when monetary policy was boring? It was a bit like walking up and down a staircase, step by step, 25 basis points at a time, each step anticipated by markets. Saying you were a central banker at a dinner party was a conversation killer.

But the world has changed. With the crisis, central bankers became leading actors in stabilizing financial systems and whole economies, constantly in the spotlight. There have been exceptional actions and exceptional results. Without the decisive steps taken by central banks in recent years, the world economy would today be much worse off. A new great depression was avoided.

Even so, we cannot rest on our laurels. The world is continuing to change. Monetary policy, and central banking, will not go back to what they used to be once the crisis is finally behind us. This tumultuous period from which we are beginning to emerge has raised fundamental questions. It has pushed us outside of our comfort zone and forced us to learn.

So we must look ahead. That is the goal of this conference: to shed some light on what the new world of central banking might look like once the world returns to more normal conditions.

Here at the IMF, we have decided to make the debate about the future of monetary policy when we reach the “new normal” an important focus of our work. Why? First and foremost because these are among the questions we receive time and again from our member countries—questions that are becoming more pressing with time.

To answer them, we need your help. The task is too large for any single individual or institution. At this conference, we are reaching out to monetary authorities in our member countries, and other leading thinkers in the field, and inviting you to reflect with us on the future of monetary policy. Much of the expertise and knowledge resides with you. What the IMF can bring to this debate is cross country knowledge, experience in organizing collaborative international efforts, and a tradition of looking at the big picture of economic policy. If we work together, I believe we will go far. This will be a multi-year endeavor, but our hope is to make a strong start, so that we can begin to disseminate first results fairly soon.

Where in particular do we want to shine the flashlight? There are many questions, and this conference concentrates on four that are especially important:
Ø Can (or should) central banks remain fully independent despite a wider mandate?
Ø How can countries retain monetary independence in an increasingly financially interconnected world?
Ø Should monetary policy have a financial stability target or lean against the wind?
Ø Should central banks continue to target longer-term bond yields in normal times?

Each question emerges from our experience with the global financial crisis. The grain of all of these questions runs against key elements of the pre-crisis consensus:
Ø The central bank’s mandate was to maintain medium-term price stability.
Ø Cross-border spillovers were mostly considered unimportant, to be taken care of by flexible exchange rates.
Ø Financial stability was left to microprudential authorities, with monetary policy left to clean up after financial busts if needed.
Ø Central banks targeted short-term market yields, leaving arbitrage to take care of the transmission to other asset prices and the wider economy.

To avoid any misunderstandings: this consensus served us well for many years. The challenge now will be to preserve what works, while making changes where needed. It will be important to think freely and innovatively, but we also do not want to throw out the baby with the bath water!

To further fuel the debate, we have captured these questions, along with some others, in a Staff Discussion Note published last week. This paper reviews the current state of the debate, extracts policy conclusions wherever possible, but also lays out clearly the unresolved issues. We hope you will pick up a copy of the paper, on the tables near the entrance.

I have no doubt this will be a fascinating and stimulating conference. The questions are fundamental, and I am delighted that so many of the best minds in the monetary policy field have assembled here today, both on the stage and in the audience, to discuss them. This fact alone is a striking testament to the interest around the world in the future of monetary policy.

I am also delighted to announce here that we will follow up this conference with another important event on July 2, when United States Federal Reserve Chair Janet Yellen will deliver the inaugural Michel Camdessus Central Banking Lecture at the IMF. We are most honored and grateful that Janet Yellen has agreed to share with us her deep insights into monetary policy. And, as you all know, Michel Camdessus was the Fund’s longest serving Managing Director, and before that Governor of the Banque de France. This new lecture series named in his honor further underlines our commitment to the field of monetary policy and our collaboration with central banks around the world.

The proceedings today are meant to be as interactive as possible. Each question will be introduced and moderated by an active policy maker, drawing on practical experience. Subsequent speakers will then debate the pros and cons of each question. Finally, the audience will join the debate, all under the leadership of the moderator. So do not hesitate to let your views be heard.

I wish you a most stimulating and productive discussion!