Why the Monetary Policy Framework in Advanced Countries Needs Fundamental Reform

In pursuing their inflation target, most central banks focus on labour market developments. In contrast, it is argued in this chapter that monetary policy should be guided much more by financial sector developments (credit and debt) and much less by near-term targets for inflation. This argument is first supported by an historical review of the negative outcomes produced by the current policy framework. A second level of support is provided by critical analysis of the need for and the effectiveness of stimulative monetary policies, and by identifying their many negative and cumulative side effects. The search for an alternative framework begins by recognizing that an economy is a complex, adaptive system. From this perspective, arguments for introducing a “narrow money” regime warrant increased attention.