Edited by Masahiro Kawai, Peter J. Morgan and Shinji Takagi
Chapter 3: Monetary Policy Strategies in the Asia and Pacific Region: Which Way Forward?
Andrew Filardo and Hans Genberg 3.1 INTRODUCTION The global financial crisis that started in the United States (US) in mid2007 shook the financial systems in the US and Europe and brought about a worldwide economic recession. What have we learned about monetary policymaking and, more importantly, what might be the way forward? While the proximate cause of the crisis can be traced to the subprime mortgage market in the US, the underlying sources went deeper than that and involved issues such as incentives in the structured finance market, overreliance on the ratings of financial products by rating agencies, and the regulatory treatment of structured investment vehicles.1 Further removed, it has also been suggested that the conduct of monetary policy was a contributing factor – specifically that policy interest rates in the US and elsewhere were held too low for too long early in the decade after the burst of the 1995–2000 internet bubble. In this regard, the excess of liquidity helped to fuel the speculative bubble in the US housing market and, through various macroeconomic and financial channels, contributed to excessive risk-taking in financial markets more generally (Taylor 2009). Moreover, some scholars have argued that too narrow a focus by central banks on price stability may have unwittingly contributed to this precipitous boom–bust cycle and, therefore, conventional monetary policy frameworks may need to do a better job of incorporating concerns about financial stability (White 2006). The macroeconomic consequences of the crisis also brought about innovations by several central banks...
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