What is it about?
The central bank sets the interest rate to achieve macroeconomic stability. Though there have been changes in policy from time to time, the essence of the policy has remained unchanged for a very long time. This paper examines afresh the policy. In doing so, it finds that the monetary policy has an implicit tax-subsidy scheme. This insight is used to considerably improve the policy.
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Why is it important?
Macroeconomic and financial instability has large and persistent costs for an economy. So, there is need for a suitable policy to deal with the problem. The prevailing policies have failed on many occasions. This paper suggests a new and more effective policy. This takes care of not only macroeconomic stability but also financial stability.
Perspectives
I have been researching and teaching on macroeconomic and financial stability for a long time. I have been dissatisfied with the standard analysis and policy. I have been thinking and writing about all this for a long time. This paper is a very important part of that thought process.
Gurbachan Singh
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This page is a summary of: Thinking afresh about central bank’s interest rate policy, Journal of Financial Economic Policy, August 2015, Emerald,
DOI: 10.1108/jfep-08-2014-0051.
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