A new class of “bubble”: Central Bank “pronouncements bubble”

According to Ken Rogoff:

Why do the comments of major economies’ central bankers command outsize attention nowadays? It is not as if they change interest rates all of the time. Nor have they developed new, more robust models for analyzing the economy. On the contrary, major central banks’ growth and inflation forecasts in the years since the financial crisis have consistently overestimated both growth and inflation – and by wide margins.

In short, there are many good reasons why central bankers receive so much media focus, including their relative independence and generally solid(!) performance. But there are also other reasons having to do with politicians’ need for scapegoats, the media’s struggle to reinvent itself in the Internet age, and central-bank pronouncements’ predictable short-term effects on financial markets. These other factors have combined to create a bubble around central-bank pronouncements and decisions that grossly exaggerates their economic significance.

Is this a bubble that central bankers should worry about? The answer is clearly yes. The news bubble is of particular concern, because it reinforces the idea that central bankers somehow care disproportionately about financial markets, which is generally not the case.

Unfortunately, financial markets care about the economy, so central banks should care too!

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