cat and not, by itself, of such enormous importance to justify devoting monetary policy solely to its control. just about the whole of the world ( whether inflation targeters or not ) has reduced inflation to manageable levels. it seems at least possible that people will begin to regard this task as so easy, and so assured of success, that monetary policy could be asked to do more. i can think of two directions in which we might be asked to do more. first, we have established a wide consensus that monetary policy can do something to smooth the course of the business cycle, but this should not be the primary goal. but if inflation control begins to look easy, people may ask central banks to focus the power of monetary policy more fully in the direction of smoothing the cycle. i do not propose to say more about this, other than to observe that this can, at least in principle, be encompassed within the inflation targeting framework, recognising the legitimate trade - off between inflation variability and output variability. but we also need to remember how much more painful it is to have to wind inflation back down, once price expectations have been disturbed. more interesting, in the current debate, is whether monetary policy should do more to achieve financial stability. a clear dichotomy or specialisation has developed, in which monetary policy is seen as the instrument for maintaining price stability, and prudential regulation is ” assigned to ” financial stability. this dichotomy is increasingly reflected in the vogue of separating the central bank from the prudential regulator. but financial stability is under constant bombardment – reflected in the increasing complexity of the basel ii rules ; the pressure to widen the reach of financial regulation ; the increasing recognition that financial stability problems are coming not just from institutions, but from markets and their evolution ; and the difficulty of staying ahead of the evolution of ever - more - complex financial instruments and products ( driven by competition and sometimes by the objective of getting around prudential regulations ). the ltcm experience is a reminder of how the leading - edge players will be constantly pushing beyond the regulators ’ capacity to understand, let alone react effectively. on top of this we see the evolution of markets, often driven by the desire to minimise risk to individuals, taking actions which may make the overall system more vulnerable – the examples here are the various forms of “ inflation targets and inflation targeting “, remarks by governor laurence h meyer at the university of california at san diego economics roundtable, san

stephen grenville : monetary policy : the end of history? speech by mr stephen grenville, deputy governor of the reserve bank of australia, at the monetary authority of singapore ’ s 30th anniversary conference on central banking in the new economic and financial landscape, singapore, 20 july 2001. * * * this session has a more philosophical theme, about the broad sweep of monetary policy. so i would like to use the opportunity to look at some history – where we have come from ; where we are ; and where we might possibly be going. it would be hard to exaggerate the changes of monetary policy in the past thirty years or so. the question i want to ask, given these extraordinary historical changes, is whether we have now reached the ” end of history ” in the sense that francis fukijama had in mind when he talked about political systems, which had evolved so that one successful system dominates and displaces others. has this happened with monetary policy? before i get into any detail here i want to record a summary answer – that monetary policy has reached a satisfactory state where it has a clearly defined ” bestpractice ” framework which is performing well ; but that it would be wrong to think we have reached some nirvana, from which no further perfecting is possible. so the short answer is ” no ” – there is more history to come. where we have come from when i first studied economics, going back more than thirty years, my recollection is that we thought about monetary policy in the following terms : · monetary and fiscal policy were near - perfect substitutes, used in tandem to achieve the same short - term goal – the smoothing of the business cycle. if the cycle could be smoothed, all would be well in the best of worlds, with inflation under control and growth as good as it could be ; · the analytical framework behind this was a non - vertical phillips curve – i. e. there was some trade - off between real output and inflation, although we did not think much about whether this trade - off would remain in the longer term ; · monetary policy worked through regulation and quantitative controls ( which were, it should be said, quite effective in this simple world ) ; · low interest rates were widely regarded as a ” good thing ”, perhaps because the number of borrowers was greater than the number of rentiers, but more probably because we thought that growth and investment were in themselves good things, and that these would be encouraged by low