Central bankers from around the world met recently in Jackson Hole, Wyoming, for their annual long weekend get-together, with global monetary policy in a state of flux. Eight years after the 2008 financial crisis, historically low interest rate settings and adventurous "unconventional monetary policy" -- in the form of quantitative easing, forward guidance and negative interest rates -- have not been enough to restore inflation and output to normal levels. Both the U.S. Federal Reserve and the Bank of Japan will meet this week to consider further action, but their room for manoeuvre is quite limited.
Monetary policy has long been seen as less effective in promoting expansion than it is in restraining excessive demand -- "pushing on a string" is the usual analogy. In this recovery, however, it has been unexpectedly ineffectual. The policy interest rate in many advanced economies has been at or close to zero (or even below) for virtually the whole of the recovery, and yet inflation remains below target and the recovery remains lackluster.