ABSTRACT
Contrary to most of the macroeconomic literature on central banking, this book focuses on financial considerations in order to discuss the appropriate role of a central bank in the management of the economy. The main conclusion that has been reached is that central banks should reform their current way of operating by changing their goal and their instruments of intervention. Their main objective should not be price stability but financial stability, and their main tool should not be interest rates but a proactive financial policy oriented toward understanding systemic risk. Interest rates on overnight central bank advances should be set at zero forever. Interest rates, as an operating tool, are grossly ineffective to manage the economic system and may promote economic fragility, inflation, speculation, misdistribution of income, and economic recession. This is especially the case in an economic system in which refinancing loans and short-term loans are in high proportion, policy rates are changed frequently and widely, and financialmarkets are dominated by fundmanagers. Financial policy should replace monetary policy and should be included in a broader policy of permanent and stable full-employment.
