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Central Banking in Turbulent Times$
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Francesco Papadia and Tuomas Välimäki

Print publication date: 2018

Print ISBN-13: 9780198806196

Published to Oxford Scholarship Online: April 2018

DOI: 10.1093/oso/9780198806196.001.0001

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Central Banking before the Great Recession

Central Banking before the Great Recession

(p.9) 1 Central Banking before the Great Recession
Central Banking in Turbulent Times

Francesco Papadia

Tuomas Vӓlimӓki

Oxford University Press

The chapter describes the historical process as well as the analytical and empirical factors that, at the end of the twentieth century, led to the dominance, in advanced economies, of a central bank model based on an independent institution devoted to price stability as its overriding objective. The central bank pre-crisis model was elegant, performing, and efficient. However, it could not easily accommodate the pursuit of a traditionally important central bank objective: financial stability. Indeed, since central banks have, in essence, just one tool, that is, the interest rate, the pursuit of a financial stability objective in addition to a price stability objective could create dilemma situations. In the two decades between the mid-1980s and the mid-2000s, the economies of advanced economies were very stable, and this period was thus identified as Great Moderation. However, subsequent experience showed that, in this period, the crisis was incubating.

Keywords:   interest rate, central bank objective, Great Moderation, financial stability, price stability

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