Monetary policy – end of history?

Sabine Lautenschläger of the ECB revisits Fukuyama’s famous phrase End of History and uses it for monetary policy:

n 1992, the political scientist Francis Fukuyama announced the end of history. The cold war had just ended, and in Fukuyama’s view, this marked “the endpoint of mankind’s ideological evolution”. Liberal democracy had prevailed; the final form of government had been reached. There was no need for history to continue.

Similar claims were made about monetary policy. The great moderation, for instance, was traced back to better monetary policy. With this in mind, some argued that monetary policy had reached a perfect and final stage. There was no need to evolve further; history had come to an end.

Or had it? Well, it seems that the unexpected always happens. And when it does, it tends to push the end of history a bit further away. This is true for politics, and it is true for monetary policy.

The unexpected happened in 2008: the global financial crisis struck and undid the great moderation. History took a sudden turn and this threw long-held beliefs overboard. Academics as well as policymakers had to adapt their thinking and their doing – monetary policy was no exception. Central banks around the world came up with new tools to keep the financial system and the economy afloat. They became key players; some observers even referred to them as the only game in town.

Now, ten years later, there is one thing that weighs on many people’s minds: When will unconventional monetary policy end? When will it return to normal? It seems that many look no further than the exit from our unconventional measures. But what will happen once we have reached the exit? Will we return to the end of history?

Well, I don’t think so. First, there are still many questions that need to be answered. And second, the unexpected will happen again at some point. History does not end. But before we discuss what will happen tomorrow, let’s take a look at today.

Nice bit.


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