Posen on Monetary Policy Activism and Asset Price Cycles
We have previously linked to Adam Posen’s work critical of suggestions that central banks should adopt an activist approach to managing asset price cycles. Here’s Posen’s talk at last year’s Cato Institute Monetary Policy Conference.
Peter Martin rounds-up opinion in favour of re-appointing Warwick McKibbin to another five-year term on the Reserve Bank Board, including some supportive comment from me.
As Chris Joye notes, there is no reason why Ross Garnaut could not be appointed to one of the other looming vacancies on the Board, allowing both Warwick and Ross to serve concurrently. That would certainly liven-up Board meetings and move the Board closer to an MPC-style model of decision-making. The government should eventually move to separate monetary policy decision-making from the Board, as I argue in this article.
In the UK, the government was brave enough to appoint an American, Adam Posen, to the BoE’s MPC. The logistics of having a foreigner other than a kiwi attending monthly RBA Board meetings would be difficult, and the local media reaction would be nothing short of hysterical, but there is no reason why foreign talent should not be considered. A foreigner would actually be significantly less conflicted as a monetary policy decision-maker than many of the existing external Board members.
While my first foreign pick would be Don Brash, my guess is he would be unwilling to serve under the existing RBA governance model. All the more reason to change it.
model simulations indicate that the past and projected expansion of the Federal Reserve’s securities holdings since late 2008 will lower the unemployment rate, relative to what it would have been absent the purchases, by 1½ percentage points by 2012. In addition, we find that the asset purchases have probably prevented the U.S. economy from falling into deflation.
Mr. Bernanke will speak to reporters at the National Press Club in Washington Feb. 3 , and take questions there…A month ago, Mr. Bernanke appeared on prime-time television on CBS News’ “60 Minutes” for the second time.
As the linked article notes, even Bernanke lags his European and Japanese counter-parts in holding regular press conferences. I make the case for an increased public profile for the RBA Governor here.
Not content with a monthly CPI, an article in Slate looks at the prospects for an even higher frequency CPI in the US. According to the article, the US CPI costs $US234m a year to compile at a monthly frequency, which works out at about US$0.75 per capita. The ABS tells us that a monthly CPI in Australia would cost $A25m a year compared to the $A10m it spends compiling the existing quarterly release, which works out at around $A1.11 per capita. There must be economies of scale in compiling the CPI. Otherwise, the ABS quote looks expensive, even at PPP exchange rates.
I recall a certain market economist in the late 1990s who would embarrass the ABS by pointing out the above-CPI increases in the cover price of the ABS CPI publication.
I make the case for a monthly CPI in Australia here.
The Year RBA Watchers Got an Involuntary Early Retirement
Ross Gittins, giving his traditional address to the Australian Business Economists’ annual forecasting conference:
It’s become a lot harder for you guys to predict now the nation’s economics editors have retired from the prediction game. But that’s the way the more loud-mouthed of your brethren seem to have wanted it.
Ross Gittins delivered a fascinating speech this week during which he gave me a subtle slap for forcing the RBA to stop tipping-off journos about the internal executive’s rate recommendations prior to its Board meetings, which in and of itself is an acknowledgement that demonstrates how right we were to push this line (our actions also brought about the demise of the former Shadow Governor, Terry McCrann, after the October meeting).
Gittins’ remarks effectively concede that the economic writers in question can’t play the prediction game nearly as well now that they have a more circumscribed relationship with the Bank. Glenn Stevens denies that Board decisions have ever been leaked, but there is a distinction between the outright leaking of a Board decision and the backgrounding and nudging of economics writers that previously took place.
Should Central Banks Publish an Official Interest Rate Projection?
The case for and against. Since the RBA already produces economic forecasts endogenised to an assumption about the future path of monetary policy, it would make sense to publish the cash rate projection as well. Changes in the projection would heavily condition the expected real cash rate and could even reduce the need for changes in the actual cash rate.
You’re a responsible Brazilian living in your decent Sao Paolo apartment (paid off!). You have a tidy pile of cruzeiros in your local bank, saved from the income your reasonable private sector job generates. But it’s 1979 and you’re worried about inflation looming on the horizon. What do you do?
Nic Rowe re-phrases the question for the benefit of a PhD candidate operating under the constraints faced by an economics blogger:
Using a macroeconomic model with monopolistically competitive firms, explain how an increase in the expected future price level will cause an increase in the current price level. Also explain whether there is an effect on real output.
Your answer must use words only, with no diagrams or equations. Be very precise about all the mechanisms that would be involved in this interdependent system of simultaneous causation. Your answer must assume no previous knowledge of economic theory or familiarity with economic concepts on the part of the reader. Try to make your answer as realistic as possible, using 10 real-world goods as examples. These should be goods that a homeowner with liquid domestic currency assets living in Sao Paolo Brazil in 1979 might want to buy in response to an increase in the expected future price level. Any transactions in your explanation must be shown to be consistent with double-entry bookkeeping. Please write clearly.
You have 2 hours to answer this question.
Of course, this has never been a deterrent to Scott Sumner, who writes blog posts faster than you can read them.
Inflation outcomes are the ultimate test of whether monetary policy has been too easy or too tight. With disinflationary pressures in the US at their most pronounced since the Volcker disinflation of the early 1980s, critics of quantitative easing would do well to ponder the counter-factual in which US monetary policy was not as accommodative. The data suggest that the risk of inflation being too low has been greater than the risk of inflation being too high.
David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?
Milton Friedman: Yes, indeed… It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.
Larry White, George Selgin and William Lastrapes recently argued that the Fed has been a failure by comparing the periods before and after its establishment in 1914. Yet there are enormous differences in the way the Fed has approached monetary and other policies in the period since 1914 that would seem to be more important in explaining these outcomes than the existence of the Fed itself. Charles Calomiris notes that for the period 1914-1951, the Fed was beholden to fallacious economic doctrines, which makes its failures readily explicable. Monetary theory and policy practice have come a long way since then. As Henderson and Hummel note, Fed policy has been far more benign than the critics would suggest.