Revisiting three intellectual pillars of monetary policy received wisdom

Speech by Mr Claudio Borio, Head of the Monetary and Economic Department of the BIS, at the Cato Institute, Washington, DC, 12 November 2015.

"It ain't what you don't know that gets you into trouble.
It's what you know for sure that just ain't so."
- Mark Twain


The speech questions three deeply held beliefs that underpin current monetary policy received wisdom: it is appropriate to define equilibrium (or natural) rates as those consistent with output at potential and with stable prices (inflation); it is appropriate to think of money (monetary policy) as neutral, ie as having no impact on real outcomes, over medium- to long-term horizons relevant for policy - 10-20 years or so, if not longer; and it is appropriate to set policy on the presumption that deflations are always very costly. Based on these considerations, the speech draws two conclusions: the well known trend decline in real interest rates is, at least in part, a disequilibrium phenomenon, not consistent with lasting financial, macroeconomic and monetary stability; and there is a need to adjust current monetary policy frameworks so that monetary policy plays a more active role in preventing systemic financial instability and its huge macroeconomic costs. This calls for taking financial booms and busts more systematically into account.