Central bankers in much of the advanced, industrialised world are at a crossroads. Despite sustained monetary easing, much of it unconventional (relative to what textbooks, or the norm, suggests), there is no strong recovery from the aftermath of 2008.
So now these central bankers are considering even more unconventional options. The following set of links sums up the current state of the debate.
To start, it is useful to understand the framework for monetary policymaking that exists in a typical advanced, industrialised country. The UK is a representative example, and this link lays out the overall framework in the UK, while this document covers the very important topic of “forward guidance”. For more background, readers may wish to consult this article from the Centre on Budget and Policy Priorities, which lays out the different options available to central banks that wish to conduct monetary policy via rules and targets.
With nominal interests at their zero lower bound, some economists are expressing a sense of resignation about the potency of monetary policy altogether. Others, however, are suggesting that there is still room for conventional monetary policy that targets interest rates, except that those targets may now have to move into negative territory. The subject of negative interest rates is addressed here and here. Both of these articles are favorable towards negative interest rates, but the first one goes further, contrasting negative rates with its polar opposite proposal, coming from the Neo-Ficherian economists, suggesting that the only way to revive an economy that has hit the zero lower bound is not to deny the existence of the bound (which is what proposals for negative interest rates ostensibly are attempting to do) but rather to raise nominal interest rates. Indeed, this last proposal is probably the most controversial among the many that central banks are faced with right now. There is also the proposal for “helicopter money”, a term that is well explained here.
And, finally, two pieces from practitioner-scholars associated with the Federal Reserve Bank system – this one, by Ben Bernanke, arguing for negative interest rates over inflation targeting, and this one, by Lael Brainard, arguing that central bankers in advanced economies such as the US must contend with a new state of affairs, that he calls the “new normal”.