Ensuring the stability of the financial system, and the role of monetary policy, will be one of the major challenges in this decade and beyond, Australia's central bank officials say.
Another issue, which came out of the response to the 2008-2009 global financial crisis, will be the how fiscal and monetary policies interact, according to a paper presented to the Reserve Bank of Australia's (RBA) 50th anniversary symposium in Sydney on Tuesday.
Considerable debate about the role of monetary policy in responding to risks to an economy's financial stability remains, the paper compiled by governor Glenn Stevens and officials Adam Cagliarini and Christopher Kent noted.
"A degree of caution is certainly warranted," they said.
"Monetary policy can't resolve every problem and central banks must always be wary of burdening policy with multiple goals, especially given the limited instruments at hand."
They said a major question was whether monetary policy could plausibly escape any responsibility for a significant rise in financial system risk associated with large increases in asset prices and credit and reduced lending standards.
Monetary policy had a role in conditioning the environment under which asset and credit booms occur, they said.
While it was desirable to have other tools to respond to excessive risk taking and rapid credit growth, people were sometimes vague about what these tools would be and unclear about how they would be effectively applied.
In examining the role of fiscal and monetary policies, Mr Stevens and his colleagues said the recent financial crisis had marked a "shift to fiscal activism" following the collapse of Lehman Brothers in September 2008.
Three key issues now confronted global policy makers.
"Is the recent set of events a one-off response to a once in a life-time event, or will fiscal policy authorities, perhaps emboldened by this experience, continue more active attempts at stabilisation policy in the future?" they asked.
"Second, and perhaps more pressing over the next few years, will governments be able to match their expansionary fiscal activism with a corresponding degree of discipline to restore budgets to sustainability?
"Third, if governments do respond to the debt trends by fiscal consolidation at some point, this may well inhibit growth for a time."
In the upcoming years, monetary policy should remain more accommodative than otherwise, they said.
But there may be attractions for fiscal authorities in committing to a path of relatively rapid fiscal consolidation.
"This would have the advantage of keeping down the costs of servicing public debt in the meantime," they said.
"It would also reduce the potential for the crowding out of private investment normally associated with high fiscal deficits and upward pressure on interest rates, particularly once central bank purchases of government debt cease, as eventually they must."
Such an outcome could also mean a lengthy period of rather low short-term interest rates.
"If that continued after the financial sector repair had largely been completed, it would raise its own set of questions about financial stability."
The trio said discussion about fiscal and monetary policy coordination will probably come back into vogue, since policy makers in both camps will want to exit from extraordinary settings, without cutting short economic recovery and without impairing their long-run credibility.
"At the very least, all of this could well mean that, one way or another, the conduct of monetary policy has an additional complication over the next decade," they added.
Debate about smoothing the near term outlook for inflation and economic activity at the cost of allowing the build-up of financial imbalances would need to be resolved during this economic cycle, they said.
"We cannot yet know how challenges in other policy areas, think of climate change for example, will impinge on the conduct of macroeconomic policies," they said.
They suggested that perhaps the main lesson to take from fifty years of history is simply not to forget the old lessons.
"They have a habit of re-emerging," they said.
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