theory

Ralph Atkins

Jean-Claude Trichet, ECB president, sometimes refers to the “brotherhood of central bankers”. He rarely criticises, even indirectly, his colleagues elsewhere in the world. At an ECB conference in Frankfurt that has opened this afternoon, Mr Trichet noted recent comments by Ben Bernanke, the US Federal Reserve chairman, describing an inflation rate of “about 2 per cent or a bit below” as consistent with the Fed’s mandate. The developed world’s two largest central banks “could hardly be more closely aligned” on inflation aims, he exclaimed.

But he drew a clear distinction when it came to the use of “non-standard measures” by the world’s central bankers. One view was they could be used like “engaging the four-wheel drive” once the end of the road had been reached. That was a clear reference to “quantitative easing” by the Fed.

In contrast, the ECB used non-standard measures to “remove the major roadblocks in front of us”. Read more

If he were still alive today, what would Milton Friedman think of his disciple, Ben Bernanke? This is a matter of some concern to the Fed chairman, who is reported as saying to colleagues on Saturday: “I grasp the mantle of Milton Friedman…I think we are doing everything (he) would have us do.”

With libertarian economists tending to be among those most critical of QE2, Mr Bernanke is relying on Friedman’s halo effect to enhance the legitimacy of the Fed’s recent actions. Friedman’s friends say that his opinions were unpredictable, which is what made them interesting. But some some free market economists, like Allan Meltzer, claim that Friedman would have strongly disapproved of QE2. Are they right?

Mr Bernanke’s admiration for Milton Friedman goes a long way back. In this famous speech, made in honour of Friedman’s 90th birthday in 2002, Mr Bernanke described his hero in simple but glowing language:

“Among economic scholars, Friedman has no peer.”

 Read more

Every day another news story predicts recession or redemption based on a different indicator. Wouldn’t it be great if there were one reasonably accurate indicator incorporating elements of them all?

Introducing ALI, the euro-wide Area Leading Indicator. This is a new index from researchers at the ECB that claims to lead the business cycle with reasonable accuracy 6 months in advance. By its reckoning, things are looking good – very good – for the next few months.

In the chart, ALI is green and pointing sharply upwards; the business cycle is black, lagging ALI by 6 months. Researchers extended the lead time (by trading off accuracy) – and that is shown by the red and yellow lines. They are in negative territory but heading sharply north.

Unlike models, ALI is quite simple and it’s real-time: it’s a number formed by Read more

The UK is likely to suffer greater volatility in inflation, output gap and yield curve after the recent crisis because of the type of rate targeted by its central bank.

New research published by BIS suggests repo rate targeters – such as the Bank of England with its bank rate – experience greater macroeconomic volatility in times of turmoil. In normal times, the difference is less obvious. Still, if a central bank adopts a policy of discretion over commitment*, repo rate targeters will suffer greater volatility even in normal times.

Central banks targeting market rates – such as the Fed and the SNB, which target the rate at which banks lend to each other – are therefore somewhat insulated from recent shocks. Researchers Read more

Slightly off-topic for a central bank blog, but fascinating nonetheless. Professor Krugman:

“So what’s the paradox of toil? If you cut taxes on labor income, this expands labor supply — which puts downward pressure on wages and leads to expectations of deflation, which increases the real interest rate, which leads to lower output and employmentRead more

The credit crisis discredited – if not disproved – the efficient market hypothesis, which states that all relevant and available information is represented in market prices. George Soros has proposed an alternative theory which has two attributes to recommend it: it both predicted the crisis and preceded it Read more