ECB Chief Economist Peter Praet talks about “nominal growth”, wow!

A James Alexander post

Frances Coppola rightly drew attention to this section of a speech by Peter Praet, ECB Board Member and its Chief Economist, actually the opening paragraph:

The euro area economy is gradually emerging from a deep and protracted downturn. However, despite improvements over the last year, real GDP is still below the level of the first quarter of 2008. The picture is more striking still if one looks at where nominal growth would be now if pre-crisis trends had been maintained.

A chart in the pack, that could accompany this statement, seems to be from the Marcus Nunes school of little stories. But it is unclear whether it is Nominal or Real GDP, probably real and it does not appear in the start of the published presentation or specifically linked to the comment quoted above. It actually originates from a Spring 2015 internal EU working party and was used back in May 2015 by Mario Draghi.

JA Praet_1

Since September it appears that Praet has also been using the following chart that nods to the importance of GDP expectations. And of course it is represents a terrible tragedy.

JA Praet_2

When the opening paragraph and the two charts are allied to the often cited charts looking at Inflation Expectations, one could get the feeling that the ECB is actually looking at NGDP expectations. The ECB is to be congratulated for looking at market-based expectations, and even confirming their usefulness vs the Fed that appears to have contempt for them.

JA Praet_3

Very sadly, the bulk of the speech is made up of a strong rear guard defence of the Philips Curve which rather spoiled my excitement. E.g.:

There are two key structural conditions that matter for the central bank to meet its objective. First, the financial transmission channel must remain intact, so that monetary policy is able to maintain sufficient traction over the economy and economic slack remains controllable. Second, a structural connection between economic slack, inflation expectations and inflation needs to exist, with the Phillips curve providing the traditional framework to account for this relationship. How the crisis has affected both conditions has been a persistent source of uncertainty for monetary policy – and remains so, to some extent, today.

The process of monetary transmission has clearly become less regular during the crisis. 

Actually, the first assumption could be challenged. ECB monetary policy has twice caused recessions in the Euro Area by tightening monetary policy when it was already tight (2008 and 2011) and until very recently the inflation ceiling message has dominated almost all discourse. The monetary transmission mechanism has worked perfectly, just to the massive detriment of the Euro Area economy. There is no puzzle, no less regular working.

And a paper from a German research institute presented at an ECB conference on the output gap poured enormous scorn on the notion that economic slack, or NAIRU could be calculated, using either the traditional or New Keynesian Philips Curve. The ECB’s NAIRU for Spain, for instance, was shown to more or less just follow the actual unemployment rate. The ECB (and the other leading central banks) should give up on the voodoo Philips Curve/slack theory of macro.

JA Praet_4

But, hey, Euro base money growth is rising, Draghi’s speech last week also showed some signs of positive monetary thinking. That things are looking up for the Euro Area are confirmed by some strong recent Eurozone  PMI data. Just stop calling out for those “close to but less than 2%” evil spirits.

2 cheers for ECB’s Praet, 0 for NYFed’s Dudley

A James Alexander post

Two interviews on 26th August showed up a chasm between the ECB and
the NY Fed, reflecting very badly on the Fed. What a difference a few
years makes. Draghi will be popping over to Yellen to tell her what to
do soon.

Peter Praet, ECB Board Member and Chief Economist said:

“There should be no ambiguity on the willingness and ability of the
governing council to act if needed … . The [asset-buying programme]
provides sufficient flexibility to do so in terms of size, composition
and length of the programme.”

NY Fed Governor and member of the Federal Open Market Committee William Dudley said:

“At this moment, the decision to begin the normalization process at
the September FOMC meeting seems less compelling to me than it was a
few weeks ago, [but an initial rate hike] could become more compelling
by the time of the meeting as we get additional information on how the
U.S. economy is performing and (on) international financial market
developments, all of which are important to shaping the U.S. economic

Dudley was only in damage limitation mode after the FOMC had actively, if only “slightly” in their eyes, tightened monetary policy with this comment in the minutes release on 19th August :

“To further reflect the Committee’s assessment that economic conditions had continued to progress toward its objectives, the Committee slightly altered its characterization of when it anticipates that it will be appropriate to begin the process of policy normalization.”

What is normal? Normal is a healthy economy growing well. Sure,
tighten policy when the economy is growing too fast, when expected
NGDP growth is 7% of something (ideally having made up for past below
trend misses). FWIW the average of the two volatile numbers for 1q and
2q 2015 is a very dull 3.7%. Tightening before excessive growth is not
normal, and will send that 3.7% lower. Dangerously low.

These central banks are too inflexible. At least the ECB is
inflexible in a good way at the moment, atoning for mulitple past
sins. The Fed is now insanely focused on “normality” rather than
prosperity. Until the Fed drops this weird obsession, the current
turmoil will not end well. I’m backing Europe.