TILBURG, Netherlands — The current economic crisis highlights the need for major changes at central banks. It is time for a return to some form of moderate monetarism — but in a 21st-century mold.
The current crisis has made central bankers' jobs far more complicated. Over the past 30 years or so, many central bankers supposed that all they needed to do was keep their sights fixed on price stability. Every instrument at their disposal was to be used for that goal. From now on, however, central bankers will have to aim for financial stability as well.
Implicitly, central banks will also have to try to ensure that a new recession does not occur. But the current institutional setup of today's central banks is highly inadequate for meeting these challenges. Central banks will have to get additional tools for their new tasks. And that is where things get very complicated.