Hope fades!

Rereading Carney´s speech from December of last year, it was not as “revolutionary” or even novel as I and several people thought at the time:

From our perspective, thresholds exhaust the guidance options available to a central bank operating under flexible inflation targeting.

If yet further stimulus were required, the policy framework itself would likely have to be changed.19 For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP (Chart 4).

Bank of Canada research shows that, under normal circumstances, the gains from better exploiting the expectations channel through a history-dependent framework are likely to be modest, and may be further diluted if key conditions are not met.  Most notably, people must generally understand what the central bank is doing – an admittedly high bar.20

However, when policy rates are stuck at the zero lower bound, there could be a more favourable case for NGDP targeting. The exceptional nature of the situation, and the magnitude of the gaps involved, could make such a policy more credible and easier to understand.21

Gone more or less unnoticed was a speech he had given much earlier at the BIS in February 2012:

In exceptional circumstances, including the zero lower bound, NGDP could work. But he also said it could be terrible:

In the worst case, if nominal GDP targeting is not fully understood or credible, it can, in fact, be destabilizing.


NGDP-level targeting may thus merit consideration as a temporary unconventional monetary policy tool. But NGDP targeting does not, in our view, amount to a complete policy framework. What is needed is a robust framework that remains appropriate and well understood under any circumstances.

Almost two years later he is even more ‘unexciting’: In a speech today he says:

The Ghost of Christmas Yet to Come suggests that it is unlikely that equilibrium interest rates will return to historically normal levels any time soon. This prospect puts a premium on macro-prudential policies and financial reforms to manage the associated risks without abandoning the need to keep interest rates in line with the equilibrium level. [let´s be plumbers!]

So while it is unsurprising that the ideas behind secular stagnation are being revived, it would be a mistake to rush to a more extreme macroeconomic response. There is a long history of pessimism in economics, from Thomas Malthus through Alvin Hansen to Robert Gordon. Such worries have proven misplaced in the past and skepticism is warranted now. Don’t forget that the US economy is more than 13 times larger than when Hansen first formulated his ideas. [History is on our side, so let´s be patient]

Similar performance must again be possible. Central banks are playing a catalytic role to help deliver it but their contribution will ultimately be limited. The most important drivers of long term prosperity will be measures taken by others to increase the growth of supply, particularly those that reinforce an open, global economy. Such good deeds will truly merit the goodwill of all men and women.

“The Ghost of Christmas Yet to Come suggests that it is unlikely that equilibrium interest rates will return to historically normal levels any time soon”. Translation: Things are going to be quite bad for a long time” and: unfortunately, “our contribution will ultimately be limited”!

I remember when almost everyone thought that Greenspan was the most powerful man on the planet!

2 thoughts on “Hope fades!

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