Mishkin has presented another excellent paper on Monetary Policy. It is a useful primer addressing the learnings in monetary policy so far.
As Monetary policy has evolved over the years since Milton Friedman days, certain scientific learnings have taken place. Governor Mishkin asks a basic question – is mon pol becoming more of science (i.e. based on scientific principles) or is it still an an art (i.e some judgement is still required)?
What do you think the answer would be? Well, of-course both. :-) all economists are two handed.
Jokes apart, it is a good quick read on the learnings so far. Mishkin points to 9:
1) inflation is always and everywhere a monetary phenomenon;
2) price stability has important benefits;
3) there is no long-run tradeoff between unemployment and inflation;
4) expectations play a crucial role in the determination of inflation and in the transmission of monetary policy to the macroeconomy;
5) real interest rates need to rise with higher inflation, i.e., the Taylor Principle;
6) monetary policy is subject to the time-inconsistency problem;
7) central bank independence helps improve the efficiency of monetary policy;
8) commitment to a strong nominal anchor is central to producing good monetary policy outcomes; and
9) financial frictions play an important role in business cycles.
He discusses each one in plain English and cites evidence that why despite many learnings, we still need judgements or why Mon Pol would continue to remain an art as well.