Moritz Schularick in Conversation: New Perspectives on Monetary Policy

Forum´s Working Paper series has a new addition - a piece by Moritz Schularick explaining why the traditional, limited mandate of central banks no longer suits current circumstances.




28. JANUARY 2022



In a new study commissioned by the Forum New Economy, Moritz Schularick explains how some of the assumptions on which central banks´ mandates where built upon no longer suit the circumstances of our times and need to evolve in line with the shifts in academic thinking, political priorities and macroeconomic paradigms.

The author predicts that central banks will look very differently in 10-20 years. Among the challenges that the inflation-targeting mandate is facing, Schularick mentions distributional issues, the existence of trade offs between a stable inflation level and full employment, and a risky relationship with financial institutions that feeds instability. With respect to these challenges, the paper explains why monetary policy is no longer distribution-neutral in a world where households have different income and wealth profiles, thereby disproportionately benefitting some and disadvantaging others. Moreover, the so-called concept of “divine coincidence” no longer holds after the heterogeneous agent revolution in macroeconomics questioning the relationship between inflation and output stabilization. And lastly, it appears that this stabilization policy feeds risky behaviours and increasingly exposes intermediaries to the systematic risks that central banks insure, increasing in turn financial and economic fragility. These issues appear all the more relevant in light of the current inflation situation and considering that the FED seems to be embracing a hawkish approach again and that many economists expect to see several rounds of rates hikes this year. Although the paper focuses on these three big challenges, the author admits that these are not the only ones central banks should consider: their role in assisting the ecological transformation, the rise of digital currencies, and the often disputed relationship between fiscal and monetary policy are equally urgent aspects that should be integrated in the debate for a new role for central banks.

The complete paper can be downloaded HERE.

The whole interview about the study with Moritz Schularick



More than a decade after the financial crisis there still seems to be something seriously wrong with the financial system. Financial markets still tend to periodically misprice risk and contribute to boom and bust cycles. A better financial system needs to discourage short-termism and speculative activity, curtail systemic risk and distribute wealth more broadly.