A James Alexander post
Another day another proof of the immediate impact of active monetary
policy in altering NGDP growth expectations and therefore setting the
flight path to a different future. In other words lags in the
implementation of monetary policy are not “long and variable” lags,
but “infinitely short and not variable”. This time it was from the ECB.
The ECB is operating a far from perfect monetary policy. It has to do
huge QE to (nominally) stimulate the EuroZone economy since it is has
massively handicapped both itself and the economy by its inflation
target of “near but no more than” 2%. Of course, it should move to a
strict NGDP Growth Level Target of 5%, but moving will not come soon.
Just floating the idea would help more than a a several tens of
billions of Euro bond purchases. Just try it!
That said, the ECB is still biased towards easing. But events
elsewhere are lowering the Wicksellian Equilibrium Rate of Interest ,
aka getting worse. The main trouble maker is the Federal Reserve with
it’s tightening bias, as well as the UK’s BoE and the Swiss National
Bank, three of the major EZ trading partners. The Fed’s bias also
hurts China since that emerging superpower has cravenly opted to
remain within the Dollar Bloc. So China is having its monetary policy
tightened while also being in a rapid economic slowdown. Not great at
all, for China or the EZ or the rest of the world.
In the face of all this bad news EZ stocks have sold off with the rest
of the world and the currency has been reasonably robust for the last
six months. These market trends indicate deteriorating economic
prospects for the EZ. Today, like a good central bank, the ECB stepped
up to the plate to counter these negative trends.
It altered the rules for the current QE programme in a surprisingly
positive way. The market responded immediately at exactly the time of
the announcement, driving up stocks and driving down the Euro vs the
A good thing, and demonstrating the impact of monetary policy on
forecasts for the real economy, and thus the real economy itself.
Actual Fed tightening and Chinese masochistic obstinacy may well swamp
these effects over the next few months but the ECB has today shown a
good determination to ring-fence the EZ from poor monetary policy
elsewhere in the world.