NZZ, August 10, 2021. PDF (title changed by NZZ). Related article in Ökonomenstimme. HTML.
Should the SNB follow the Fed and the ECB and rework its strategy? There is a case for rethinking the broad inflation target, the monetary policy concept, and the communication strategy. Equally important is a strategy review outside of the SNB: The SNB cannot and must not decide about the framework within which it operates.
Daher ist eine Strategieüberprüfung inner- und ausserhalb der SNB sinnvoll. Geldpolitisch prüfenswert sind das Inflationszielband, die Zentralität des Zinsinstruments und die Kommunikation. Die Glaubwürdigkeit der SNB verbietet ein Auseinanderklaffen von Theorie und Praxis, aber auch allzu häufiges und detailversessenes Feilen an der Strategie, und sie verlangt Konzentration auf das Wesentliche. Gleichzeitig sollte die SNB ihre Bindung an den – gegebenenfalls sich wandelnden – Willen des Gesetzgebers betonen. Bei Fragen, die nicht allein in ihre Zuständigkeit fallen, muss sie klarstellen, dass sie Partei und nicht Schiedsrichterin ist. Damit die SNB auch in Zukunft zu den grossen Schweizer Erfolgsgeschichten zählt, muss sie von Zeit zu Zeit über die Bücher gehen. Doch alleine kann sie die Verantwortung in Geld- und Währungsfragen nicht tragen.
On his blog, Ben Bernanke weighs the pros and cons of negative (nominal) interest rates vs. a higher inflation target to create monetary “policy space.” His main points are:
- Lower rates work immediately. In contrast, a higher inflation target only works once agents’ expectations adjust. A higher target may not be politically tenable a thus, not be credible. In contrast, “institutional changes … [such] as eliminating or restricting the issuance of large-denomination currency, could expand the scope for negative rates.”
- Both negative rates and higher inflation have negative side effects. But the side effects of negative rates would materialize only during bad recessions.
- There are reasons to expect that higher inflation would impose a relatively larger burden on the “poor” while negative interest rates would impose a relatively larger burden on the “rich.”
- The political risks for the Fed associated with a higher inflation target may be substantial.
In the 18th Geneva Report on the World Economy, Laurence Ball, Joseph Gagnon, Patrick Honohan and Signe Krogstrup ask whether “central banks can do [more] to provide stimulus when rates are near zero; and … whether policies exist that would lessen future constraints from the lower bound.”
They are optimistic and argue that the unconventional policies of recent years can be extended: “[I]t is likely that rates could go somewhat further than what has been done so far without adverse consequences” and “[m]ore stimulus can be provided if policymakers increase the scale of quantitative easing, and if they expand the range of assets they purchase to include risky assets such as equity.” While the authors concede that QE might have negative side effects they argue that the benefits are worth the costs.
To relax the zero lower bound constraint in the future, Ball, Gagnon, Honohan and Krogstrup argue in favor of a higher inflation target. They view cashless societies as not imminent but possible.
In a Project Syndicate post, Axel Weber argues that inflation targeting needs to be rethought.
Within a complex and constantly evolving economy, a simplistic inflation-targeting framework will not stabilize the value of money. Only an equally complex and highly adaptable monetary-policy approach – one that emphasizes risk management and reliance on policymakers’ judgment, rather than a clear-cut formula – can do that. Such an approach would be less predictable and eliminate forward guidance, thereby discouraging excessive risk-taking and reducing moral hazard. … intermediate targets … could potentially be applied to credit, interest rates, exchange rates, asset and commodity prices, risk premiums, and/or intermediate-goods prices. … Short-term consumer-price stability does not guarantee economic, financial, or monetary stability.
Chris Gilles reports in the FT about Olivier Blanchard’s plans to retire as IMF chief economist. Olivier emphasized the importance of academic research and challenged the Washington consensus. Under his watch, the IMF
- questioned the benefits of unrestricted capital flows;
- suggested higher inflation targets;
- emphasized costs of “austerity.”
As the article points out not all of these initiatives were successful.
The ECB announced the long-awaited expansion of asset purchases. The press release lists these main points:
- ECB expands purchases to include bonds issued by euro area central governments, agencies and European institutions
- Combined monthly asset purchases to amount to €60 billion
- Purchases intended to be carried out until at least September 2016
- Programme designed to fulfil price stability mandate
Less expected is the arrangement for the sharing of “hypothetical losses”. The ECB will directly be exposed to only 20% of the risk of the additional asset purchases.
Another ECB website provides an overview over the ECB’s open market operations.
John Cochrane continues his investigation into non-standard implications of the Fisher equation (see my post on his previous discussions). Could central banks target expected inflation?
The Economist worries about deflation, specifically in the Euro area. The central passages are:
Central bankers can no longer set real (that is, inflation-adjusted) interest rates low enough to restore demand. Wages, incomes and tax revenue all stall, undermining the ability of households, businesses and governments to pay their debts—debts which, in real terms, will grow more burdensome under deflation.
… bad deflation results when demand runs chronically below the economy’s capacity to supply goods and services, leaving an output gap. That prompts firms to cut prices and wages; that weakens demand further. Debt aggravates the cycle: as prices and incomes fall, the real value of debts rise, forcing borrowers to cut spending to pay down their debts, which ends up making matters worse.