Central Banks have a hard time understanding their mission

To some it´s keeping inflation low, but that´s a target, not a mission. Then they get worried and put up ‘thresholds’ but again that´s not a mission, it´s an intermediate target. Then they get all worried about ‘financial stability’, and see themselves facing an impossible trade-off, mostly because they think monetary policy is about interest rate policy, but at the moment that´s either very low or ‘zero’.

Their mission is to obtain nominal stability, the framework under which myriad of individual and group decisions can most adequately be made. So it´s not at all surprising that exactly during the period when nominal stability was greatest, the economy flourished. Inflation was low and employment high.

In the late 1960s and 1970s, nominal stability became unhinged in an upward direction – upward trending nominal spending. Over the last five years nominal stability became unglued in the downward direction – nominal spending way below trend.

Ryan Avent puts it well:

The past few days have made it overwhelmingly clear that the Fed is steering this recovery. That should be comforting; all it has to do is steer things in a more expansionary direction! But it isn’t, because the Fed keeps looking around and wondering, who’s got the wheel?

3 thoughts on “Central Banks have a hard time understanding their mission

  1. Richard Fisher says the problem is Feral Hogs on Wall Street:


    “Richard Fisher, president of the Dallas Federal Reserve and a member of the rate-setting Federal Open Market Committee, said in an interview with the Financial Times that while the big players in financial markets acted like “feral hogs” by scenting any weakness in policy makers’ intent, he did not think anyone could break the U.S. central bank.”

  2. When will the Fed (and ECB and BoJ) get it: They have to steer an obvious course towards economic growth, and let inflation take a back burner for a while; better yet just shoot for a nominal target (a nice high one, I’d say).

    Steve: Feral hogs? Is my first wife loose again?

  3. Pingback: Central Banks have a hard time understanding their mission | Fifth Estate

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