Central banks’ shift to an unemployment objective: What consequences?

Central banks in OECD countries have now e xplicitly (Federal Reserve, Bank of Japan, Bank of Canada, Reserve Bank of Australia) or implicitly (ECB, Bank of England) moved to a monetary policy that targets a reduction in unemployment. This has been made possible by the sharp reduction in the correlation between core inflation and the unemployment rate. But it also corresponds to a change in central banks’ mandates, exacerbated by the COVID crisis. This development: May create conflict where public opinion (Germany) is strongly attached to combating inflation; Means that monetary policies will remain expansionary throughout periods of economic expansion, which entails a number of unpleasant consequences: Permanently low interest rates will prevent central banks from being able to respond to a recession that is not caused by rising interest rates; It incentivises borrowing and therefore asset price bubbles and therefore financial instability; Growing rejection of bonds as a vehicle for private savings, requiring an increase in central banks’ share of bond holdings.