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...ividual asset prices successfully, and creating a macroeconomic mess byspricking a bubble would ruin the reputation of a central bank. Certainly, monetary policysmistakes after 1929 (as documented by =-=Friedman and Schwartz, 1963-=-) are ample evidencesfor advising central banks to take all necessary steps to avoid, as far as possible, propagatingsthe consequences of a collapse of asset prices through the financial sector to the...

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...n signals “no need to change central bank interest rates” orsmight even indicate downward risks, whereas credit (and money) are rising together withsasset prices increases. The “risk taking channel” (=-=Borio and Zhu, 2008-=-; Adrian and Shin,s2009) explains how low interest rates foster the emergence of financial imbalances and createsthe risk of a following collapse of asset prices (see also BIS, 2010). Rajan (2005) had...

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... neglect of money and credit was a common factor not only in academic research (see e.g. Woodford 2003; Eggertson/Woodford 2003) but also in a number of central banks (see e.g. the impressive work by =-=Meltzer, 2009-=-). Though being fully aware of all the problems demonstrated over time by a lot of research I never understood how monetary policy could ignore “money” and how the central bank should not care about “...

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... in which monetary factors do not play an active role.sIncluding “frictions” in such models might be useful as a research strategy, but cannot givespractical advice to monetary policymakers (see e.g. =-=Curdia and Woodford, 2010-=-). Svenssons(2009, p. 7) makes a rather sober statement:s“Before such extensions of the modelling framework are operational policymakerssand staff have to improvise and apply unusual amounts of judgem...

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... studies on “Lessons” gives the impression that research has taken up this challenge. On monetary policy a legion of papers has already been published (e.g. Bean 2010; Clarida 2010; Fahr et al. 2010; =-=Mishkin 2010-=-, Svensson 2009), and many more will come. A number of papers discuss issues in the broader context of general macro and/or prudential aspects (Blanchard et al 2010; IMF 2010). Most approaches start f...

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...money from being asmajor source of macroeconomic disturbance.sAt the same time, monitoring money and credit can create a “barrier” against major policysmistakes and following macroeconomic disasters (=-=Christiano and Rostagno, 2001-=-). Thesmonetary pillar warns of rising imbalances in the monetary sector, which are in generalscorrelated with financial imbalances, and helps the central bank maintain a steady hand (Fahrsand others,...

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...s domestic inflation) might be influenced by global developments. Thissaspect has been studied by a number of papers (e.g., Sousa and Zaghini, 2004; Borio andsFilardo, 2007; Rüffer and Stracca, 2007; =-=Alessi and Detken, 2009-=-; Ciccarelli and Mojon,s2010). This leads to the question of what a central bank can achieve acting alone and whatswould then be the consequence for the exchange rate.sAs already discussed,snotwithsta...

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...isis of the dimension just seen. A flood of studies on “Lessons” gives the impression that research has taken up this challenge. On monetary policy a legion of papers has already been published (e.g. =-=Bean 2010-=-; Clarida 2010; Fahr et al. 2010; Mishkin 2010, Svensson 2009), and many more will come. A number of papers discuss issues in the broader context of general macro and/or prudential aspects (Blanchard ...

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... all credit. Now the tide seems to turn. Interestingly it is the financial crisis which has triggered considerations if asset price booms caused by credit expansion should not be a matter of concern (=-=Blinder 2010-=-; Mishkin 2010). There should have been ample evidence before the crisis that money and especially credit can be a driving factor of asset prices. 6 Research by the BIS (e.g. Borio/ Lowe 2002; Borio/ ...

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...ion. 3 This prevailing orthodoxy embraced what I have called the “Jackson Hole Consensus” as it was prominently presented several times at this conference (Greenspan 2002; Blinder/Reis 2005; see also =-=Mishkin 2007-=-): 1. Central banks should not target asset prices. 2. Central banks should not try to prick a bubble. 3. Central banks should follow a “mop up strategy” after the burst of a bubble which means inject...

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...n it seems. Taylors(2007) presents a “counterfactual” exercise to show how the Fed could have moderatedshouse price developments by a timely increase in interest rates. (For a different approach,ssee =-=Orphanides and Wieland, 2008-=-.)sNew research and empirical evidence have delivered further arguments in favor of thespotential effectiveness of using the central bank interest rate to stabilize financial marketss(Papademos, 2009)...

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...easures or quantitative easing have also raised concerns about the relation of the central bank with the fiscal authority. The world of central banking will not be the same as it was before (see e.g. =-=Goodhart 2010-=-). However, this is no reason to ignore the principles of sound monetary policy which were developed over time. Progress in policy comes by crises, research has to work on the scientific fundament for...

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...onetary developments therefore provides the basis for a medium-term orientation that paysstribute to substantial time lags and protects the central bank from the risk of destabilizings“activism” (see =-=Issing, 2002-=-). Friedman’s (1968, p.12) warning is today as relevant as ever:sThe first and most important lesson that history teaches about what monetary policyscan do—and it is a lesson of the most profound impo...

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.... to what extent it just relies on a traditional inflation forecast or which role is e.g. given to money and credit when deciding monetary policy. This concept is now more or less widely adopted (e.g.=-=Walsh 2009-=-) and in this sense also the European Central Bank might be called “inflation targeter” (Issing et al.2001;Issing 2004). 3) Inflation targeting as a theoretical concept of optimal monetary policy. The...

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...essons” gives the impression that research has taken up this challenge. On monetary policy a legion of papers has already been published (e.g. Bean 2010; Clarida 2010; Fahr et al. 2010; Mishkin 2010, =-=Svensson 2009-=-), and many more will come. A number of papers discuss issues in the broader context of general macro and/or prudential aspects (Blanchard et al 2010; IMF 2010). Most approaches start from what is see...

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...his is consistentswith even higher annual inflation?sWhen the ECB evaluated its monetary policy strategy, it also studied the risk of the zerosbound and the appropriate definition of price stability (=-=Issing, 2003a-=-). As a result, strongsarguments against an “upper bound” of more than 2 percent were presented.sA fundamental objection against the consideration to raise the target in order to have moresroom for re...

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...tary policy. Thissconcept is now more or less widely adopted (e.g.,Walsh, 2009), and in this sense also thesEuropean Central Bank might be called an “inflation targeter” (Issing and others, 2001; ands=-=Issing, 2004-=-).s3) Inflation targeting as a theoretical concept of optimal monetary policy. The crucialselement here has been and still is the link between an inflation forecast and monetaryspolicy decisions. In t...

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...e boom bust behaviour driven by expectations of productivity elements. Interestingly, monetary analysis may also overcome information problems in identifying developments in the real sector (see e.g. =-=Gerberding et al. 2010-=-). 4. More Lessons? There are a number of other important issues which are discussed under the headline “Lessons from the Crisis” The challenge from the “zero bound” has been discussed since long. Cen...

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...extending the asymmetry in the so-called risksmanagement approach that was advocated by Greenspan (2005). One might ask if thissconcept should be applied at all in monetary policy (for a critique see =-=Buiter, 2008-=-).sHowever, risk management as a strategy to deal with low-probability events and severesoutcomes should by construction be neutral towards upside and downward risks. This wouldsimply that the cost-be...

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...cts and thereby on the outlook for inflation.4 This prevailing orthodoxy embracedswhat I have called the “Jackson Hole Consensus” (since it was prominently presented severalstimes at that conference (=-=Greenspan, 2002-=-; Blinder and Reis, 2005; Mishkin, 2007)),sspecifically:s1. Central banks should not target asset prices.s2. Central banks should not try to prick a bubble.s3. Central banks should follow a “mop-up st...

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...n the outlook for inflation.4 This prevailing orthodoxy embracedswhat I have called the “Jackson Hole Consensus” (since it was prominently presented severalstimes at that conference (Greenspan, 2002; =-=Blinder and Reis, 2005-=-; Mishkin, 2007)),sspecifically:s1. Central banks should not target asset prices.s2. Central banks should not try to prick a bubble.s3. Central banks should follow a “mop-up strategy” after the burst ...

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... dimension just seen. A flood of studies on “Lessons” gives the impression that research has taken up this challenge. On monetary policy a legion of papers has already been published (e.g. Bean 2010; =-=Clarida 2010-=-; Fahr et al. 2010; Mishkin 2010, Svensson 2009), and many more will come. A number of papers discuss issues in the broader context of general macro and/or prudential aspects (Blanchard et al 2010; IM...

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...10; Mishkin, 2010). There should have been ample evidence before thescrisis that money and especially credit can be a driving factor of asset prices.7 Research bysthe BIS (e.g., Borio and Lowe, 2002; =-=Borio and Lowe, 2004-=-) and by the ECB (e.g.,sDetkensand Smets, 2004) support the view that nearly all major unsustainable booms in asset pricesswere accompanied if not preceded by strong increases in credit and/or money. ...

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...mension just seen.sA flood of studies on “lessons” gives the impression that research has taken up thisschallenge. On monetary policy, a legion of papers has already been published (e.g., Bean,s2010; =-=Clarida, 2010-=-; Fahr and others, 2010; Mishkin, 2010; and Svensson, 2009), and manysmore will come. A number of papers discuss issues in the broader context of general macrosand/or prudential aspects (Blanchard, De...

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... just consider the consequences of a potentialsbursting of a bubble but also be applied to estimating the risks implied in an emerging bubblesand the costs and benefits of trying to prevent this (see =-=White, 2009-=-). Seen from thissperspective, the foremost challenge would be to prevent the development of a huge bubblesrather than to concentrate on what should be done once a bubble bursts. Should this not besth...

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...dencesfor advising central banks to take all necessary steps to avoid, as far as possible, propagatingsthe consequences of a collapse of asset prices through the financial sector to the realseconomy (=-=Issing, 2009-=-).sHowever, restricting the role of the central bank to be totally passive in the period of thesbuild-up of a bubble and practically pre-announcing the bank’s function as a “savior” once asbubble burs...

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... ECB’s strategy which are connected via cross-checking into an integrated approach (see e.g. Beck/Wieland 2008). As intended from the beginning monetary analysis was deepened and broadened over time (=-=Issing 2005-=-). The analysis of developments of different monetary aggregates, components, and their counterpart with monitoring all aspects of credit is a huge challenge, but delivers also important insights (see...

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...strategy,swhich are connected via cross-checking into an integrated approach (see e.g. Beck andsWieland, 2008).sAs intended from the beginning, monetary analysis was deepened and broadened over times(=-=Issing, 2005-=-). Analyzing the developments of different monetary aggregates, components,sand their counterparts by monitoring all aspects of credit is a huge challenge, but it alsosdelivers important insights (see...

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...nd Wieland, 2008.)sNew research and empirical evidence have delivered further arguments in favor of thespotential effectiveness of using the central bank interest rate to stabilize financial marketss(=-=Papademos, 2009-=-).ssEven small changes in the spread between long- and short-term interest rates mightshave a substantial effect on the profitability of financial actors with high leverage andsmaturity mismatch prob...

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...the impression that research has taken up thisschallenge. On monetary policy, a legion of papers has already been published (e.g., Bean,s2010; Clarida, 2010; Fahr and others, 2010; Mishkin, 2010; and =-=Svensson, 2009-=-), and manysmore will come. A number of papers discuss issues in the broader context of general macrosand/or prudential aspects (Blanchard, Dell’Ariccia, and Mauro, 2010; and IMF, 2010).sMost approach...

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...es/Wieland 2008.) New research and empirical evidence have delivered further arguments in favour of the potential effectiveness of using the central bank interest rate to stabilize financial markets (=-=Papademos 2009-=-). 1) Even small changes in the spread between long- and short-term interest rates might have a substantial effect on the profitability of financial actors with high leverage and maturity mismatch pro...

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...ntext it is interesting to follow the headlines under which this approach was presented: From „inflation targeting“ to „inflation targeting with judgement“ to „flexible inflation targeting“ (see e.g. =-=Svensson 2005-=-). To be fair, authors representing this philosophy acknowledge now that financial factors have to be taken into account. How far is this driving flexibility? 2inflation targeting implies the pretens...