Former Bank of England Governor Mervyn King, commenting on a speech given by then Fed Chairman Greenspan, said "any (coherent) monetary policy can be written as an inflation target plus a response to supply shocks." What do these comments mean and what insight do they provide us to the focus of central banks?
What will be an ideal response?
Governor King is pointing to the fact that central banks focus particularly on the rate of inflation, that's why he made the comment regarding the inflation target. But central banks also consider general economic conditions. As a result, supply shocks will have central banks responding to the shocks by changing interest rates to levels they otherwise would not absent the shock. In summary, the statement that central banks focus generally on economic conditions and particularly on the rate of inflation holds true and is revealed by the comments.
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