The art of monetary policy: Lessons from Sun Tzu for central banks

Central banks are navigating a world of higher debt, tightly interconnected markets, and rising geopolitical tensions. In this excerpt from her new book, “The Art of Monetary Policy: Lessons From Sun Tzu for Central Banks,” MIT Sloan School of Management professor Kristin J. Forbes offers guidance based on six military principles from Chinese philosophy.

The art of war is of vital importance to the State. It is a matter of life and death, a road either to safety or to ruin. Hence it is a subject of inquiry which can on no account be neglected.

— Sun Tzu, “The Art of War,” Chapter 1, Principles 1 and 2

Many of Sun Tzu’s military insights from the fifth century B.C. could have been written for central banks today. Monetary policy is of “vital importance to the State,” and over the past two decades central banks have played prominent roles in stabilizing economies and finding the “road” to “safety” instead of “ruin.” 

Fighting the 2008 global financial crisis and 2020 COVID-19 pandemic has been nearly as complicated, contentious, and costly as many military battles, forcing central banks to innovate and develop a multifaceted set of new weapons that have substantially expanded the banks’ authority and reach. 

This has, not surprisingly, raised questions about the utilization and effectiveness of these new tools and broader powers. An “inquiry can on no count be neglected” — not only to understand the past, but also to plan for the future, as central banks will inevitably be drafted into service during the next economic and financial conflagration. 

In a world of higher debt levels, tightly interconnected markets, and rising geopolitical tensions, effective responses by central banks will be even more critical because the casualties from miscalculations will only grow over time.

In my book, I attempt to perform this “inquiry.” I draw lessons for central banks from the last two, tumultuous decades and use these insights to provide suggestions for how central banks can improve their responses and support more resilient economies in the future. To do so, I draw on the writings of the Chinese philosopher Sun Tzu, a military strategist whose principles have not only endured for 2,500 years but have also been applied to a wide range of disciplines and personal lives.

My conclusions echo those of Sun Tzu; the decisions that lead to success are more of an art than a science but should be based on several core tenets. 

For central banks, this “art of monetary policy” should involve six principles:

1. Careful planning. The interconnection of global markets combined with recent financial innovations allow shocks to propagate much more quickly and violently than in the past. Policymakers may have little time to craft a response. Detailed contingency planning must be done ahead of time.
2. Accepting the inevitability of external shocks. The role of these events, whether from “heaven” or just outside your border, has grown over time and can have first-order effects on financial markets and the broader economy. Central banks should adjust their strategies, mandates, and goals to accept and adapt to these forces over which they have no control.
3. Establishing a strong tactical position within the constraints of “earth” and the “terrain.” With careful planning, such as establishing strong macroprudential defenses, economies can build a more resilient starting point, such that they are better fortified against the large and “heavenly” external shocks.
4. Combining different weapons for the specifics of each situation. The appropriate blend and timing of tools, weapons, and methods vary based on the situation — with recent lessons for central banks on when it is best to solely adjust policy interest rates, when it is best to solely adjust balance sheets, and when these tools can be used simultaneously (and even simultaneously in opposite directions in some circumstances). 
5. Maintaining flexibility to quickly adapt when the situation evolves, especially as shocks can transmit in new and unexpected ways. As central banks have experimented with new tools, they have learned that certain combinations can restrict their ability to adjust when the environment changes.
6. Evaluating the short- and long-run trade-offs. A final principle is the importance of accounting for the resources and costs of different strategies over different time horizons in order to fully assess the trade-offs. Some tactics used over the last two decades were seen as a “free lunch” a priori but generated substantial costs ex post when the battle was won (particularly quantitative easing). This is a reminder of the need to account for broader contingencies and outcomes when assessing trade-offs.

There is no single action, tactic, or equation that can guarantee victory, but following this set of guiding principles can greatly increase the odds of accomplishing your goals (and of avoiding the worst losses and outcomes).

Excerpted from “The Art of Monetary Policy: Lessons From Sun Tzu for Central Banks,” by Kristin J. Forbes. Reprinted with permission from The MIT Press. Copyright © 2026.

Kristin J. Forbes is a professor of global economics and management at the MIT Sloan School of Management. From 2014 to 2017, Forbes served as an external member of the Monetary Policy Committee for the Bank of England. She has also served as a member of the White House’s Council of Economic Advisers and as a deputy assistant secretary in the U.S. Department of the Treasury.

In 2019, Forbes was named an Honorary Commander of the Order of the British Empire by Queen Elizabeth II. Forbes is currently the convener of the Bellagio Group, a research associate at the National Bureau of Economic Research and the Centre for Economic Policy Research, and a member of NBER’s Business Cycle Dating Committee and Council on Foreign Relations. She received her PhD in Economics from MIT.

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