Over the last decade, the profile of central banks has gone up. First, we had the Great Moderation - a period of extraordinary benign macroeconomic environment globally, characterized by steady growth in advanced economies and accelerated growth in emerging economies, and low and stable inflation all around. Central banks took credit for this, believed they had discovered the Holy Grail and declared victory. That sense of triumph was dented by the crisis as central banks came to be blamed for policies and actions that got the world into the crisis. Even so, central banks battled the crisis from the frontlines and regained some of the lost reputation by acting quickly, decisively, and where required in concert, to stabilize the global economy which was hurtling towards collapse. Over the last few months, fears of a double-dip recession have resurfaced, and governments in advanced countries are locked in a policy logjam over the balance between short-term fiscal stimulus and long term fiscal consolidation. This has pushed central banks to the fore once again as monetary stimulus has to bear the burden of being the first, and in some cases, possibly the only line of defence against recession. The crisis has been an intellectual challenge in many ways. It has tested the armory of instruments available to central banks and the limits of their policy force. It has also reopened questions that we thought had been answered and renewed debates that we thought had been settled. The real world problems are too complex to fit template solution of text books. Some of the complexities and dilemmas in real world policy making, from the perspective of the Reserve Bank of India (RBI) are explained. [Comments at the Stern School of Business, New York University]. URL:[http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/MPDP26092011.pdf].
