Central bankers have helped quell CPI inflation and won a measure of market credibility and institutional independence, but they face new challenges. One is the threat that e-money and electronic commerce pose to the operation of monetary policy; this is probably overrated, largely because the cash to GDP ratio has been surprisingly stable or is declining only slowly in most countries.

The most significant new threat is asset price inflation and associated financial instability. Just as the battle against consumer price inflation seems to have been won, a different form of inflation is rampant in equity and property markets. The challenge, it seems, has shifted from instability in the monetary system to wider forms of financial instability. The typical pattern is large upswings in asset prices leading to over-valuation, followed by sharp corrections and associated financial stress or collapse. Individual financial institutions become overextended during the boom, and their failure creates difficulties for the rest of the system via contagion. Increasingly, however, the financial distress being encountered is systemic, affecting a wide gamut of institutions; the knock-on effects may lead to a recession or even debt deflation. In other words, the dynamics of the financial system and the health of the real economy have become more closely connected.