Draghi “We never pre-commit” – well isn’t that exactly your problem?

I don’t particularly feel an obligation to comment on today’s ECB monetary policy announcement and I think my regular readers have a pretty good idea about how I feel about the ECB these days. However, ECB chief Mario Draghi pulled out a traditional ECB phrase on the outlook on monetary policy that I think pretty well describes the ECB’s problem and why we are in mess we are in.

Mario Draghi said – as Trichet used to before him – that “we never pre-commit” to any particular future monetary policy action. My reply to Draghi would be isn’t that exactly your problem!?

Yesterday, I did a post on the importance of the expectational channel in monetary policy and how the Chuck Norris effect or what Matt O’Brien has called the Jedi mind trick can be a tremendous help in the conduct of monetary policy. If you have a credible target and credible reaction function the markets are likely to do most of the lifting in terms of monetary policy implementation. However, when Draghi is saying that the ECB is not pre-committed on monetary policy then he is effectively saying “We don’t want to tell you what your target is and we are not going to reveal our reaction function”. That of course means that the ECB will get no help from Chuck Norris (the markets) to implement policy.

On the other hand if Draghi had said “The ECB is pre-committed to use whatever instruments in our arsenal to achieve our nominal targets and will do unlimited amounts of buy or selling of assets to achieve these targets” then Draghi would not have to do much more. Chuck Norris would help him so he could spend more time golfing.

However, you get the feeling that the ECB on purpose wants to be ambiguous on what monetary policy action it will take and what it want to target. From a monetary policy perspective this makes no sense at all. Why would a central bank do something like that? What monetary theory is telling the ECB that it is a good idea not to pre-commit?  I think the answer is nothing to do with monetary theory and everything to do with public choice theory. The special ECB lingo like “we never pre-commit” seem to be designed to ensure the legitimacy of the ECB. The lingo is simply rituals that should convince us that the ECB is a legitimate institution and it’s powers should not be questioned. See more on this topic here.

Robert E. Keleher R.I.P.

I was saddened by the news that Robert E. Keleher has pasted away on May 27 at an age of 67. Keleher pioneered what he termed the Market Price Approach to Monetary Policy. I my view Keleher’s work on monetary policy clearly was similar to Market Monetarism.

Here is Kurt Schuler on Freebanking.org:

“Bob’s most significant work was Monetary Policy, a Market Price Approach, a book he wrote with Manuel H. Johnson. Bob developed the ideas that led to it while working as Johnson’s adviser when Johnson was vice governor of the Federal Reserve Board. It was published in 1996, after they had left the Board. It is, to my knowledge, the only book-length treatment of the question, What indicators should a central bank with a floating exchange rate use to conduct a forward-looking monetary policy? This is, obviously, the question facing most major central banks in the world today, and the answer is vital to the well-being of billions of people.

None of the work I have seen on inflation targeting addresses the question in a fully satisfactory way. Using last month’s inflation reading to guide this month’s monetary policy is like driving using the rear-view mirror. Proponents of inflation targeting understand this point, and they advocate an emphasis on expected inflation, but they do not say enough about the particular indicators that an inflation targeting central bank should use. In practice, central banks do look at particular indicators using particular frameworks, but their procedures are tacitly embodied in institutional practice rather than explicitly articulated in the way Bob’s book does.

The market price framework rests on ideas that come from the Swedish economist Knut Wicksell, and it is therefore of interest to any current of thought influenced by Wicksell’s monetary theory—not just inflation targeting, but nominal GDP targeting, more discretionary approaches to central banking, and even free banking. Advocates of nominal GDP targeting say, “Target the forecast!” The market price framework can help the private sector make the forecast. If free banking were to take the form envisioned by Friedrich Hayek, with competing floating-rate currencies, the market price framework can help issuers of currency decide how much currency to issue.

The particular forward-looking market price indicators the framework recommends examining are broad indices of commodity prices; foreign exchange rates; and bond yields. No mechanical rule suffices for judging whether the central bank is supplying an equilibrium amount of the monetary base, so the book explains how to examine indicators jointly and extract signals from them.”

I believe that Keleher’s work on monetary policy is highly relevant to today’s crisis and his work deserves a lot more attention than it has gotten. I have previously written on Keleher’s work. See here and here.

Robert. E. Keleher, R.I.P.

%d bloggers like this: