Market disequilibrium, monetary policy, and financial markets : insights from new tools
Résumé
We revisit the main building blocks of the theoretical models underlying the monetary policy
consensus before the Great Recession. We highlight how the failure of these models to prevent
the crisis and to provide guidance during the recession were due to the excessive confidence in
the ability of markets to coordinate demand and supply, and to the neglect of the role of finance.
Furthermore, we outline the main elements of an alternative approach to monetary policy that put
emphasis on the processes driving coordination in markets, and on the externalities transmitted
by financial inter-linkages. Many elements of this new approach are captured by new classes of
models, namely, agent-based and financial network models. We discuss some insights from
these models for the conduct of monetary policy, and for its interactions with fiscal and macroprudential
policies.
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