Financial Stability, Monetarism and the Wicksell Connection (The 2007 John Kuszczak Memorial Lecture)*

In today's discussions of central banking, maintaining macro-financial stability tends to be treated as ancillary to the pursuit of price level goals. This is in strong contrast to the earlier literature, where financial stability was often the main concern of the theory of central banking. This theme is explored first from the point of view of the monetarist tradition, in which a key feature of financial crises was the onset of an excess demand for money which the central bank in its capacity as lender of last resort had an obligation to relieve; and then from that of a later Wicksellian tradition, where co-ordination failures in the inter-temporal allocation of resources that it was monetary policy's task to avoid, were emphasized. Though there are no long-lost sure cures for financial instability awaiting discovery in the older literature, its emphasis on the potential for markets to fail to clear provides a helpful perspective on the phenomenon, often missing from modern models of the conduct of monetary policy.