Conference – 1991 General Discussion

Macfarlane

A lot of discussion covered the question of what should be the aim of monetary policy. Several participants were happy with the conventional view that monetary policy should be directed towards an ultimate objective, such as inflation or nominal GDP, but others were not so sure. No-one put forward a case for an intermediate objective such as a monetary aggregate or the exchange rate. However, several eclectic approaches were put forward. A couple of participants were of the view that monetary policy should have given more emphasis to the rise in asset prices: they felt that monetary policy was particularly well suited to deflating an asset price boom. Others disagreed. The main points of disagreement seemed to be that:

  1. movements in asset prices could be very erratic, and there could be a large movement in an important asset price in otherwise stable circumstances;
  2. the international evidence seemed to suggest that it is not easy for monetary policy to prevent major changes in asset prices. For example, few people would suggest that US monetary policy was excessively easy over most of the 1980s, yet they had a major asset price boom. This was also true or some other countries where monetary policy was not accused of being excessive easy. Asset prices to some extent have a life of their own, and do not seem to be greatly influenced by changes in the cost of finance.

Following a point made in Professor Valentine's paper, a couple of participants suggested that the asset price boom and slump had mainly been a problem for prudential policy rather than monetary policy, because it had not fed into the general rate of inflation.

One participant said that, while he did not wish to dispute the general conclusion reached about monetary policy in the 1980s, he felt that the 1983/84 period had got off a bit lightly. If 1987 was to be characterised as a period where monetary policy had perhaps erred on the easy side, then late 1983 and 1984 should perhaps also be placed in the same category.

There was also some criticism made about 1988. Whilst it was felt that interest rates were raised about as fast as could reasonably have been expected by international standards, there was a lot of criticism of the accompanying rhetoric, or lack of it. The political statements in mid 1988 that the rise in interest rates “was only seasonal”, and that they “would be down again by Christmas”, were taken at face value by borrowers. The rises were therefore seen as temporary and did not have the intended effect of deterring borrowers. There was general support for their recent practice of announcing monetary policy changes.