Rossi presents the mainstream and conventional view that considers money to be ‘neutral’ on real magnitudes and attributes to monetary policy the single goal of price stability. The author then elaborates on monetary targeting/inflation targeting strategies, which have resulted in output and employment losses and have contributed to inflating credit bubbles that, eventually, led to financial crises of a systemic nature. Rossi recommends that monetary policy should aim at financial stability as well as higher employment, abandoning the dogma of central bank independence.
This chapter clarifies different points that are the backbone of the debate between horizontalists and structuralists. It first draws a clear-cut distinction between money and bank deposits in order to set the record straight as regards the working of a single-bank system. It then elaborates on the role of the central bank in a multi-bank system, to show that even central-bank money is always and everywhere an endogenous phenomenon, owing to the need of a means of final payment on the interbank market. On these grounds, it explains a central bank’s interest-rate determination, referring to the Canadian case, which is a very efficient system for interest-rate control.
The origin of the 2008 financial crisis can be found in the architecture of domestic payment systems, which are also used for international settlements despite the purely accounting nature of bank money. This chapter will discuss the essential principles of the necessary reform of the current international payment system, which must ensure the emission of a purely scriptural money reserved for national central banks, for the final payment of all transactions involving two separate currency areas. Here we explain that only a supranational currency will guarantee national and international financial stability.