Rules vs central bank superheros

I have a new piece in today’s City AM on central bankers as (pretend) superheros versus rules based monetary policy:

LARRY Summers is out of the race to succeed Ben Bernanke as Fed chair. After months of debate, with politicians and media picking over Summers’s personality and background, the spotlight has returned to Janet Yellen, deputy Fed chairwoman. Is she now a certainty? Or is another monetary superhero about to emerge?

All of this recalls the moment when George Osborne announced that Mark Carney would be governor of the Bank of England. Carney was described by both the chancellor and the media as a superstar. It’s hard to miss the parallel with the hubbub around Gareth Bale’s £85.3m switch to Real Madrid.

But it’s a problem when monetary policy becomes viewed as uniquely dependent on a single “personality”. Central bankers should not be seen as star footballers. At best, they are referees. This is partly a problem of job description. What should the governor do? Should he or she fly about, putting out fires as they erupt in the economy? Or should he or she follow clearly defined monetary policy rules?

Over the past five years, we have grown increasingly used to the idea of the fire-fighting central banker. Even in 1999, Time magazine described Alan Greenspan, Robert Rubin and Summers as “The Committee to Save the World” for their role in the Asian crisis, the Russian crisis and the collapse of long-term capital management. Summers’s reputation nearly landed him the top job at the Fed.

Read the rest here.

It is time to stop worrying about austerity – also in the UK

I have a piece in City AM today on the impact of fiscal austerity in the UK:

FIVE years ago, nearly every macroeconomist agreed that central banks determined aggregate demand (total spending in the economy), and that fiscal stimulus was therefore unnecessary to lift depressed economies. Conversely, fiscal austerity was seen as irrelevant at best for overall growth; any impact of austerity on demand can be offset by the right monetary policy – though tax cuts could, of course, boost aggregate supply.

But the age-old discussion about the relation of fiscal policy to growth has resurfaced. Keynesian economists – including Òscar Jordà and Alan M Taylor in a paper just released by the National Bureau of Economic Research – claim that government austerity is to blame for lacklustre UK growth since 2010.

There are technical issues with the paper that make Taylor and Jordà’s precise numbers hard to evaluate. And as the economist David B Smith has noted, the important question of fiscal sustainability is not even addressed. But the more fundamental issue in the whole debate is the idea of “monetary offset”.

Read the rest here.

Mark Carney’s tiny step in the right direction

I have an oped in UK’s City AM on Bank of England’s new forward guidance regime. Yes, I am disappointed…

ALMOST everyone will be disappointed by governor Mark Carney’s announcement yesterday. Those hoping the Bank of England would announce more monetary easing will feel let down. And while those of us hoping for strictly rules-based policy do have something to be happy about, Carney needed to go much further.

The Bank has now spelled out its own version of the Federal Reserve’s Evans Rule. The “Carney Rule”, as we might call it, implies that the Bank will commit itself to maintaining interest rates at the present level as long as unemployment is above 7 per cent, and the Bank’s inflation forecast is below 2.5 per cent….

Read more here

PS Mark Carney tightened monetary policy yesterday. Just look at the pound (it strengthened) and the UK stock market (it dropped). So those who fear that inflation is about to get out of control in the UK are very wrong.

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