The focus of the paper is to analyze how the concept behind central bank policy developed over time and how the recent financial crisis and its consequences will have an influence. While the principles of the institutional arrangement for central banks (independence, clear mandate, prohibition of monetary financing) are relevant as ever, pre-crisis consensus strategies of monetary policy have been revealed as flawed. The close monitoring of money and credit developments, a key lesson to be drawn from the crisis, however, does not imply the extension of the central bank’s mandate to financial stability. As much as central banks should demonstrate modesty in what they deliver, equally their reputation should not be challenged further by other tasks imposed upon them.
Keywords: Central banking; Financial stability; Monetary policy
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.