The New Monetary Policy Revolution: Advice and Dissent

The Jeremiahs predicted this revolution would fail to reduce unemployment and lead only to financial ruin. The Jeremiahs were proved wrong on both counts. Radical whatever-it-takes monetary expansion rescued a depressed world economy. Regulatory reform kept financial risks in check. Because central banks now have two distinct monetary policy instruments – their balance sheet as well as the policy interest rate – monetary policy may have financial stability as an objective in addition to its traditional macroeconomic one.

The questions for 2021 and beyond are two. The first is: if the mix of large balance sheets, a sudden jump in government debt and yet-to-be-determined regulatory failures creates new financial stability or macroeconomic risks, what should central banks do? The second is: will governments let them?

Some reviews for this occasional paper include:

The purposeful choice of asset holdings by central banks represents a historic revolution in monetary policymaking, comparable to the introduction of purposeful variation of short­ term market interest rates more than a century ago. Following a distinguished career at the BIS, where he got to observe this important new development at first hand, Philip Turner lays out clearly in this short book the underlying economics. As he explains, the implications for monetary policy are profound both conceptually and practically.

Benjamin M Friedman, Professor of Political Economy, Harvard University

This book provides a balanced and perceptive assessment of the policy challenges facing central banks in combining interest rate policies and balance sheet policies to protect both price stability and financial stability.

Philip Lane, Chief Economist and Member of the Executive Board, ECB

Philip Turner has written the most comprehensive analysis yet of the revolution in central banking since the global financial crisis. He deftly skewers the critics and shows that Keynes and others anticipated the usefulness of central bank balance sheets nearly a century ago.

Joseph E Gagnon, Senior Fellow, Peterson Institute of International Economics

Philip Turner's book is a beautifully written and well-argued study of current monetary policy issues in the main Western countries. Since these issues are becoming ever more salient, it deserves a wide circulation and readership

Charles Goodhart, Emeritus Professor, London School of Economics

This superb book provides a lively and illuminating narrative of key monetary and financial controversies over the past twenty years, including some deep disagreements between policy makers observed first hand by the author...impressive guide through vast array of theoretical and empirical work.

Morris Goldstein, former Deputy Director of Research, IMF