Kohn, Donald

One type of cost arises because monetary policy is a blunt instrument...

We simply do not have good theories or empirical evidence to guide policymakers in using short-term interest rates to limit financial speculation. Given our current state of knowledge, my preference at this time would be to use regulation and supervision to strengthen the financial system and lean against developing problems. Monetary policy would be used only if imbalances were building and regulatory policies either were unavailable or had proven ineffective. The homework assignment is to improve our ability to identify incipient financial imbalances and understand their interactions with changes in policy interest rates.