A Revolution in Monetary Policy

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  • Topic: Economics, Bank, Financial crisis of 2007–2010
  • Pages : 3 (731 words )
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  • Published : May 12, 2013
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A Revolution in Monetary Policy: Lessons in the Wake of the Global Financial Crisis

Introduction:

This speech by Prof. Joseph E. Stiglitz was delivered at RBI’s fifteenth “C.D. Deshmukh Memorial lecture”. Mr. Deshmukh was RBI’s first governor who set the foundation for a culture that has made RBI as exemplary among the central banks of the world as it is today. Prof Stiglitz elaborates that the fact that RBI plays a role that goes much beyond a mere handling of finances came to light during the global economic crisis of 2008, which was largely caused by a failure of central banks in USA and Europe. This was mostly because of the mentality of its first governor, Mr. Deshmukh, who understood the importance of the state’s role in providing credit for the development of the nation.

Through this lecture, Prof. Stiglitz wanted to explain his view of how central banks should function, especially in the aftermath of the 2008 global crisis. He says that the Global Economic crisis was just one of the examples that have led to the discovery of the flawed existing economic paradigms, which caused the failure of the world economy in the first place. Thereafter Prof. Joseph suggests 14 lessons for monetary policy that will help countries respond to economic crisis, especially since the world is on the verge of yet another recession. Stiglitz has deduced these measures from the great recession of 2008. They are:

1. Self regulation doesn’t work:

The first thing that Prof. Stiglitz dismisses is the notion that financial markets are self-regulating. Initially it was believed that the financial sector had become highly regulated due to conflicts of interest and predatory practices. However, advances in economic theory eventually explained why markets were likely to be unstable.

In the 1970s and 80s, the general theory of imperfect and asymmetric information was developed which showed that whenever information is imperfect and asymmetric, and risk markets...
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