Unfocused vacation musings on money – part 2

It is sunny this morning in Skyrup and we are planning a daytrip to Kristianstad. The Danish king Christian IV founded the city of Kristianstad in 1614. We might be in Sweden, but Kristianstad still has its old Danish name and the Danish heritage is visible everywhere – including in the city’s Coat of Arms. Notice the C4 for Christian IV. Notice also the Swedish colours. This is true Skåne – combining Danish and Swedish. I like that.

Low for longer – a promise to fail?

Global stock markets rallied yesterday as both the Bank of England and the ECB gave forward guidance on interest rates promising to keep them “low for longer”. Now you might think I would be happy that both the BoE and the ECB promised to keep monetary policy easy, but I am not. Yes, I am happy that that ECB is not about to hike interest rates and I think that is really what the markets were celebrating yesterday, but I fundamentally think it is a bad idea for central banks to communicate in terms of their operational instruments rather than communicating in they want to achieve and it is particularly a bad idea to communicate in terms of interest rates.

As Milton Friedman tells us interest rates are low when monetary policy has been tight and inflation and growth expectations are low. Hence, when a central bank is telling us to keep rates low it is effectively telling us that growth and inflation will remain low. So in a sense when the BoE and ECB tell us that they will keep rates long for longer the central banks are indirectly telling us that they will fail.

However, why are the markets then rallying? Well, because the real message was not about rates, but about a commitment not to tight monetary policy any time soon.

And finally if anybody watched ECB chief Mario Draghi yesterday – I saw a couple of minutes it is after all vacation time – then they would not think that he is revolutionary modern central banker who is fantastic at communicating. But he nonetheless sent European stock markets strongly up. This tells a lot of how little the markets expect from the ECB. Imagine that he had given real forward guidance. He could end the crisis in the euro zone with the right words and a credible commitment to end the ECB’s deflationary policies.

Regarding the Bank of England I must admit I am nervous about Mark Carney’s ability to convince his colleagues on the MPC to do the right thing. “Low for longer” will not be enough. He needs to become much clearer on what he wants to achieve.

Kelly Evans on letting the market forecast NGDP

I think it would be much easier for Mark Carney to do his job if he listened to these very good comments from Kelly Evans on CNBC TV on how to use markets for forecasting NGDP. She explains the case for letting markets predict NGDP very well and I am of course particularly happy that she mentions one of my recent blog posts on why we should leave it to the market to decide on “tapering”.

It is very good to see this idea is getting a boost. Here are a number of my old posts on prediction markets etc.

This is why we need an NGDP futures market
Ben maybe you should try “policy futures”?
Yet another argument for prediction markets: “Reputation and Forecast Revisions: Evidence from the FOMC”
Benn & Ben – would prediction markets be of interest to you?
Prediction markets and government budget forecasts
Central banks should set up prediction markets
Markets are telling us where NGDP growth is heading
Scott’s prediction market
Robin Hanson’s brilliant idea for central bank decision-making

A blind policy maker will crash the economy

While we are talking about getting better information about the economy in Europe and in the US policy makers in China apparently seem to think that less information is better. This is from Bloomberg:

China suspended the release of industry-specific data from a monthly survey of manufacturing purchasing managers, with an official saying there’s limited time to analyze the large volume of responses.

… The disappearance of data on industries including steel adds to issues hampering analysis of the world’s second-biggest economy, after fake invoices inflated trade numbers this year. Neither the federation’s nor the statistics bureau’s statement on the manufacturing Purchasing Managers’ Index this week gave readings on export orders, imports and finished-goods inventories or an explanation for the omissions.”

A few days ago there were reports that certain words such as “credit crunch” had been banned in the Chinese media.

It is pretty hard to be optimistic about Chinese policy makers’ ability to handle the crisis when they apparently insist on being blind.

Leave a comment


  1. “interest rates are low when monetary policy has been tight and inflation and growth expectations are low.”

    I thought interest rates were low when there was a lot of savings. Are these view incompatible?

  2. Benjamin Cole

     /  July 5, 2013

    Excellent post. Yes, the globe’s central banks have to act upon results, and desired results, not this obsession with their own policy instruments.

    Bernanke is also making key error. He consistently talks about when they will “taper down.” He never looks forward to “tapering up.”

    The markets sense that the Fed has a bias against stimulus. Even when inflation is at 0.7 percent, and the number of people employed in the USA is lower than in 2008

    Bernanke never says, “With inflation at 0.7 percent, we have to taper up.”

    I think ZLB, Japan style is in the cards Europe and the USA.

  3. jpirving

     /  July 5, 2013

    @Ivan Savings relative to investment demand is one of many determinants. We only see ~0% short rates after a big policy misstep. There are two says short rates can go up, 1. an upshift in the expected level of future NGDP or 2. the CB can use its currency monopoly to steer any single nominal asset price. Draghi is saying that he won’t do #2—he won’t be Trichet—and markets like that. The goal is to get him to pick #1. If he could switch the ECB’s policy tool to an NGDP futures price, and convince markets that EMU NGDP would climb 8% next year, euro zone short rates would probably jump…150 basis points. I’m making that number up but you get the idea.

  1. Unfocused vacation musings on money – part 2 | Fifth Estate

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: