Monetary policy's 'new normal' will challenge central bank independence, say IMF staff

A staff discussion paper released today by the IMF takes stock of the "intense discussion about what shape monetary policy should take once economic conditions have settled down into the post-crisis ‘new normal'" – ultimately raising "more questions than it provides answers".

The authors of Monetary Policy in the New Normal: Tamim Bayoumi, Giovanni Dell'Ariccia, Karl Habermeier, Tommaso Mancini-Griffoli, Fabián Valencia, and an IMF staff team, address the following questions:

• Should there be new objectives for monetary policy?
• Should current policy decision rules be reconsidered?
• Should there be greater international policy cooperation?
• Should unconventional policy tools become conventional?
• What are the new challenges for central bank independence?
• What is the optimal arrangement for monetary, macro-prudential and micro-prudential policy?

They conclude that while "in many ways, the monetary policy framework should stay the same", "in other ways, however, the framework may need to change". Other intermediate objectives, such as financial and external stability may have to play a greater role than in the past to guarantee macroeconomic stability.

This expanded mandate, the authors warn, "requires either new tools or the acceptance of new trade-offs. An expanded mandate also complicates accountability and presents challenges for central bank independence".