“Central bankers must maintain monetary stability, at the same time as they work to reduce boom-bust cycles. Fiscal policies must be put on sustainable trajectories that avoid even the possibility of sovereign debt crises. And regulatory policy must focus on systemic risk, reducing both the frequency and the severity of financial disaster. Given the centrality of monetary stability to my argument, let me elaborate on it a bit further. Management of these large assets and liabilities is allocated based on price signals. Monetary instability distorts these price signals, which in turn distort asset allocation. Furthermore, the wealth transfers between creditors and debtors caused by things like inflation or deflation are a function of the size of balance sheets. Inflation hurts creditors, while deflation hurts debtors. I would argue that, given the size of international (and domestic) balance sheets, monetary stability is more important than ever.”
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