There is no longer any theory behind monetary policy choices

Central banks’ monetary policy choices can no longer be guided by theoretical analysis, since all the theories usually used are now rejected. For example: There is no longer any correlation between the cyclical situation of the economy (unemployment rate, output gap) and inflation, which means that central banks no longer have the basis for conducting a countercyclical policy; There is no longer any link between money supply growth and inflation in the long term, which means that central banks no longer have a theoretical reason to stop their balance sheet expansion, and which makes it impossible to meet a long-term inflation target; There is no link between long-term inflation expectations and actual inflation in the long term , which means that it makes no sense for a central bank to try to “anchor” long-term inflation expectations, and which negates the credibility theory; The concept of neutral real interest rate does not exist in an open economy with free international movement of capital, where the equilibrium between savings and investment is achieved through external borrowing and not through an adjustment of real interest rates. Accordingly, theory cannot guide monetary policy choices, both in a short-term perspective (reaction to the economic cycle, when to stop the central bank’s balance sheet expansion, securities purchases) and in a long-term perspective (anchoring of inflation expectations, return of the key interest rate towards the neutral interest rate). Monetary policy choices are therefore simply empirical and pragmatic: the central bank changes its monetary policy, takes the time to look at the effect on the economy and, depending on this effect, continues or discontinues this policy .