Monetary Policy as both "Science" and "Art"

Monetary policy, conducted by central banks with the goal of price stability, has aspects of both "science" and "art." From the former perspective, a scientific approach is emphasized, where monetary policy operations are formulated and their results verified based on theoretical analysis using macroeconomic models and empirical analysis using data. On the other hand, from the latter perspective, craftsmanship is considered important, involving the reading of subtle signals from macroeconomic and financial market movements to lead to more accurate policy judgments.

In the 1990s, dynamic stochastic general equilibrium models, known as New Keynesian models, were developed, establishing a theoretical framework that supports inflation targeting, the standard monetary policy framework. In this context, the aspect of monetary policy as a "science" became more strongly recognized.

However, during the global financial crisis since 2008, the importance of craftsmanship-like "art" increased once again. Many central banks in advanced economies faced the zero lower bound and adopted unconventional monetary policies, purchasing various financial assets and expanding their balance sheets. However, the accumulation of theoretical and empirical research regarding unconventional monetary policy is not yet sufficient. In the widely used conventional New Keynesian models, the stance of monetary policy is summarized by the policy interest rate, and the central bank's balance sheet, money, and credit volume do not appear. While extending these theoretical models is an urgent task, it is still a work in progress.

Monetary policy decisions are made in real-time, using all information available at each point in time. To make such policy judgments more robust, it is important to refine the "science" of monetary policy by accumulating theoretical and empirical research, while simultaneously passing down the "art" of accurately applying academic knowledge within a changing financial and economic environment.

Since the late 1990s, Japan has pioneered various unconventional monetary policies, ranging from the zero interest rate policy, which promises to maintain policy rates near zero for the future, to quantitative easing policies that increase the outstanding balance of central bank current accounts to a certain level, and the current quantitative and qualitative monetary easing. Utilizing my 32 years of experience as an economist at the Bank of Japan after graduating from the Faculty of Economics, I hope to conduct research and education that bridges the "science" and "art" of monetary policy.