A James Alexander post
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.
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.
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.
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.
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.