Christmas musings on life, money and blogging

As year is coming to an end I am sure that a lot of you like myself are reflecting on life and the world you live in. Here is a bit of what I have been thinking about this year and about what I think will be my focus in my blogging in the coming year.

Three years of blogging is not important

2013 was my third year of blogging and I still enjoy it as much as when I started in October 2011. However, when I think of 2013 my blogging was certainly not the most importing thing. The most important thing to happen in 2013 was undoubtedly that our second child – Mathilde – was born on February 7. Being a parent puts everything else into perspective. Compared to that the daily ups and downs of the the global markets and the craziness of global central banking is really completely without importance.

Becoming a dad for a second time certainly has reduced the amount of time I have had for blogging and my blogging intensity has gone down. So I am blogging less these days than I used to. But the real reason isn’t really the family expansion, but rather that the world of monetary policy has been changing – for the better and as a result the global crisis has been easing dramatically.

Getting out of the crisis

The de facto introduction of the Evans rule in the US in September 2012 worked. There is no doubt about that in my mind. As a result the fear of a black swan event has clearly gone down. The markets no longer think that every small hiccup will blow up the global financial system and the global economy. Just think of the US government shutdown – nobody else than partisan political pundits ever thought of it as any particular risk to the US economy. And surely enough the US economy continues to expand despite of fiscal tightening in the US.

In that sense 2013 has been the year where it was so clearly demonstrated that Scott Sumner is right about the what has come to be known as the Sumner Critique – under inflation targeting, Price Level Tarting, NGDP targeting or the Evans rule the fiscal multiplier is zero – also if interest rates are at the Zero Lower Bound. The monetarists are right – the keynesians are wrong. It is that simple – Krugman forecasted that the fiscal cliff would cause a new recession. It didn’t. You can consolidate public finances without getting into a recession – just make sure that you get monetary policy right.

The New 90s – will we stop talking about monetary policy?

As the year is coming to an end I am sure that Ben Bernanke is also reflecting on life and money. He is leaving the Fed. His start at the Fed was catastrophic. However, in the end he got it right. Or at least he has done enough in terms of moving US monetary policy towards a rule based framework to ensure that the US recovery continues. And I would expect it to continue in 2014. In fact I am very optimistic on the outlook for the US economy. I have fantasies about “the New 90s” – a period of a positive supply shock and excess capacity in the US economy and a fairly rule based monetary policy where nominal GDP consistently growth by 4-6% and inflation is 1-2%, which will ensure real GDP growth of 3-5% in the coming 5 years.

This is obviously great and in many ways we can argue that we have returned to a world similar to the Great Moderation. US monetary policy is now fundamentally what Bob Hetzel has called a Lean-Against-the-Wind with credibility regime. That is certainly not a perfect world – far from it. But it is good enough to make monetary policy uninteresting for most economic commentators as this amount of nominal stability makes the world look like a Real Business Cycle world. If monetary policy provide a fairly large amount of nominal stability then ups and downs in the economy will be a result of supply side shocks.

My bet is therefore that there is will be significantly less discussion about monetary policy in the coming five years than over the past five years. For somebody who blogs about monetary policy that is bad news. Or rather we have to think about how we blog about monetary policy. The Market Monetarists should continue to push for the right policies, but the discussion should not be about what the Fed should do at the next FOMC meeting, but rather be about fundamental institutional change.

Furthermore, I can’t help thinking that when the Fed got it more or less right in 1990s Milton Friedman mostly stopped talked about monetary policy and instead started to talk about ending the war of drugs. I do not plan to start blogging a lot of this topic, but I think I will focus more on some of Friedman’s non-monetary policy ideas – school vouchers, the Negative Income Tax and drug liberalization.

Warning against the moral hazard problems

Monetarism was big in the 70s and 80s, but when the Fed – and other central banks around the world – finally got it right and monetary policy increasingly became rule based in 1990s interest in monetarism disappeared. I to some extent fear the same will happen to Market Monetarism. Market Monetarists identified the reasons for the crisis and gave a clear recipe for moving out of the crisis.

That has made Market Monetarism interesting. However, is there still a need for Market Monetarism as we are getting out of the crisis? There surely is – particularly as Market Monetarism in my view never was a about a one-off monetary stimulus to end this crisis, but rather about a way to think about money and macroeconomics and particularly about rule-based monetary policy.

As a consequence I think my blogging is likely to move in a slightly more abstract direction in 2014. The day-to-day monetary events in the US is likely to become increasingly boring. Yes, tapering is a challenge, but overall I am pretty convinced that the Fed will manage this without major problems. US monetary policy is certainly not my major concern for 2014.

Looking further ahead I would actually think that what would move to the centre stage for Market Monetarists in the coming years is to not only argue for a even more rule-based monetary policy – including the use of NGDP futures – but it is also the time to start to warn about the very significant increase in moral hazard problems we have seen around the world. These problems are significant – particularly in Europe. That said, in Europe we still have moved nowhere in terms of monetary policy. The euro zone today is the gold bloc in 1934-35 – the crisis has eased, but there has not been any fundamental change to the monetary policy regime. That is unsustainable. I will continue to argue that in my blogging in 2014.

Kuroda’s success will continue in 2014 – I hope

It is not only the US that moved in the direction of a more rule based monetary policy. Japan has done so as well. After 15 years of failure the Bank of Japan under the leadership of governor Kuroda finally seem to be getting it right. I have paid quite a bit of attention to Japan in 2013. It has been great to follow how Kuroda’s new policy already has taken Japan out of deflation and the seen the Japanese economy starting an impressive recovery. Everything is certainly not perfect in Japan, but those who have said that monetary policy was ineffective at the Zero Lower Bound certainly have a problem explaining what have happening in the Japanese economy over the past year.

Looking into 2014 I expect the BoJ to continue it’s successful policies – and no I don’t fear a Japanese fiscal cliff. I am no fan of tax increases but the planned sales tax hikes in Japan will not kill the recovery. Rather it will be a reason for Kuroda to demonstrate that he is serious about taking Japan out of the deflationary trap.

George Osborne’s biggest success

I never was too impressed with UK chancellor of the exchequer George Osborne, but his decision to appoint Mark Carney as new Bank of England governor surely – so far – has been a success. Even though I personally has been somewhat disappointed with Carney’s performance it is unquestionable that there has been a major change in expectations about monetary policy in the UK and the UK economy is now recovering from the crisis. In fact particularly the recovery in the UK labour market is rather remarkable.

I remain quite fearful that the Bank of England’s success is mostly luck and that it still could derail the recovery and I particularly fear that the BoE might move to tighten monetary policy prematurely. Unfortunately in many ways the BoE is not that different from the ECB and its commitment to a rule-based monetary policy is certainly not strong and even more importantly it seems quite clear that the BoE as an institution is fundamentally not really – at this stage – able to think about monetary policy as money base control rather than interest rate targeting. That is unfortunate and that could bring new troubles for the BoE in the future. Furthermore, I am deeply skeptical about what seems to be an obsession with macroprudential policies at the BoE. I hope 2014 will be the year where the BoE continues to demonstrate that it is not a bad copy of the ECB.

Those who did well in 2008-9 has disappointed in 2013 – will it continue in 2014?

In 2008-9 some central banks managed the shock much better than others. For example the Swedish Riksbank, the Polish central bank, Bank of Canada and the Reserve Bank of Australia all did quite well in 2008-9. However, the performances of these central banks over the past year indicate that they did well because they where lucky rather than because of the fundamental institutional set-up guiding policy for these central banks. Hence, in my view all of the four mentioned central banks have erred on the hawkish side over the past 1-2 years – mostly because they have been overly focused on risks that should be of no concern of central banks.

Just take the Swedish and Australian central banks’ preoccupation with property prices and household debt. I particularly continue to be puzzled how the RBA fail to realize that it’s continued obsession with property market is also a direct reason why the Aussie dollar remain very strong (something the RBA also don’t like). Governor Stevens did you ever hear about the Tinbergen rule?  You cannot target four targets – interest rates, property prices, the Aussie dollar and inflation with one instrument (the money base).

The Riksbank recently has cut its key policy rate to 0.75% and there is a very clear risk the we will test the Zero Lower Bound if there is another negative shock to the Swedish economy (for example a policy induced downturn in the Swedish property market). I am afraid the Riksbank is completely unprepared for conducting monetary policy at the ZLB. Therefore it will be very interesting watch economic and particularly monetary events in Sweden in 2014.

But if the Riksbank needs inspiration on how to conduct monetary policy at the ZLB it should look to another small-open economy in Europe with a currency called the crown – the Czech Republic. In 2013 – after years of failure to do the right thing – the Czech central bank (CNB) finally moved to ease monetary policy by putting a floor under EUR/CZK at 27 – effectively devaluing the koruna by 4%. CNB acknowledges that there might be an ZLB (its key policy rate is at 0.05%), but there is no liquidity trap. Monetary policy can easily be eased also with interest rates at zero.

Even though I don’t think that the implemented policy change in the Czech Republic is enough I have high hope that it will spur nominal GDP growth in 2014 (my best estimate is by 1%-point compared what would have happened without policy change). Given the continued moderate downtrend in oil prices I would expect that supply side factors would keep Czech inflation well-below the CNB’s 2% inflation target in 2014 so most of the pick-up in NGDP growth is likely to be reflected in higher real GDP growth rather than a pick-up in inflation. That should keep the door open for the CNB to ease monetary policy even furthermore (my bet is that the CNB moves the “target” on EUR/CZK up in February or March.)

So I am looking forward to seeing CNB governor Singer teaching other central bankers around the world a lesson in how to conduct monetary policy at the ZLB in 2014. Because one thing is clear – we might be moving out of the crisis, but most central bankers still have a very hard time letting go of their obsession with using “the” interest rate as a policy instrument.

Merry Christmas

This has not exactly been a very well-organized blog post, but it has been written over three days and I really rather go back to the Christmas celebrations with the family.

So Merry Christmas to all of my readers from Mathilde, Mathias and Hanne and myself. See you soon.

PS I didn’t write much about the ECB above. There is a reason for that – we want to keep things positive during Christmas.

PPS I did not provide any links above to my earlier posts on a number of topics above (I will rather play with Mathias and Mathilde…), but I would be very happy to hear, which posts of mine you have enjoyed over the year and what topics you think I should focus on in 2014.

Leave a comment


  1. Hi Lars,

    I think the best post from you this year is There is nothing unconventional about money base control. It really highlights a very important institutional problem: that central banks think in terms of interest rate targeting and not money base control.

    However, while that was for me your best post, I enjoyed this blog very much because you countinuously highlight news (and institutions) from other, less known central banks, which makes for quite interesting reading. In particular emerging markets analysis is usually lacking in the media, so I encourage you to continue doing that. The US-centric focus of most other blogs means that sometimes things get boring (everyone is looking at the same events), and this is certainly not the case here. Keep up the good work!

    Merry Christmas!

  2. RaviVarghese

     /  December 27, 2013

    While you say blogging about monetary policy and central banking is relatively unimportant, I for one have learned a terrific amount from reading your blog over the past 3 years. And as you point out – if we get monetary policy right, we can focus on other important things, as in the 90s. My analogy is that I sometimes feel that finance is an unimportant sideshow in the world but it allows entrepreneurs and yes, even governments, to keep improving other aspects of our existence. So keep up the great work! A very merry Christmas to the Christensen family, and here’s to a boring world of successful NGDPLTs in 2014.

  3. Rajat

     /  December 30, 2013

    Thanks for your blogging, Lars, and thanks in particular for your observations regarding the RBA. I agree that Australia has benefited from good luck more than good management and that the RBA seems to be or have become too relaxed about slower nominal growth. If anything, I would argue that policy has been too tight here for about three years, rather than one or two as you suggest. Although CPI inflation and NGDP were fairly strong in 2011, I would put that down to: (1) (for CPI) strong electricity network tariff increases (which have little to do with current demand and operate more like an indirect tax increase) and (2) (for NGDP) strong commodity prices and mining investment, which again have little to do with general demand conditions.

    I agree that the RBA seems to be holding back in part due to concerns about house price inflation. But the funny thing is, the RBA’s recent public statements on house prices appear aimed at hosing down these concerns, suggesting that prices are only just reverting to their prior (2010) peak. However, in 2012, Governor Glenn Stevens gave a speech entitled “The Glass Half Full”, which I think provides useful insights into the origins of our current problems – along the lines of: “We’re experiencing slower growth right now outside of mining; get used to that; we shouldn’t increase gearing to speed things up”. Interested in your thoughts on that.

  4. james in london

     /  January 2, 2014

    Lars. Seasons Greetings.

    Off topic, a bit. Been looking at Thailand’s political troubles, which obviously have some deep structural causes, especially the urban/rural divide. However, I remain surprised by the low level of inflation in the country. They do have decent RGDP growth, but NGDP growth is quite poor for such a developing country. Demographically they do look more Western, with quite a surprisingly ageing population. But, you have to wonder whether low’ish NGDP growth and poltiical troubles are connected.


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