Draghi gives a Monetary Economics 101 class

A James Alexander post

ECB President Draghi was on far better form in his press conference after the April ECB Council meeting  than the one in March.

It was great to hear the German journalists having the special pleading of their insurance companies, pension funds and savers slapped down time and time again by Draghi. They are only one country in the Eurozone, like it or lump it. The ECB sets policy for the whole monetary area.

German leaders and economists also do those special interests a massive disservice by not helping them to understand the direction of causality when it comes to monetary policy. Low rates are a sign of tight money, not loose, or ultra-loose as so many supposedly clever commentators like to mistakenly opine. High rates are a sign of loose policy.

In a splendidly clear answer to one journalist, about 38 minutes in, Draghi stated:

Low interest rates are a symptom of low growth and low inflation. It’s not the monetary policy consequence … as I’ve said before, if we want to return to higher interest rates we have to return to higher growth and higher inflation to do so we need the current monetary policy, that’s the necessary condition [for a recovery].

Hear, hear!

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