Central bankers give voice to a revolution

Ótimo artigo, publicado no domingo, sobre a revolução em curso na política monetária.


Ben Bernanke seemed unusually buoyant at his press conference this week. He smiled – more than once; there was a folksy story about his roots in South Carolina, and a joke about his facility with a southern accent.
The chairman of the US Federal Reserve had reason for cheer and for a little pride: his committee had just said it would keep interest rates close to zero until the US unemployment rate falls below 6.5 per cent (it is 7.7 per cent today). For a central bank, let alone the Fed, to tie rates to the economy in this way was without precedent.
The move speaks of a quiet revolution that is sweeping over central banks. A day earlier, Mark Carney, currently governor of the Bank of Canada, soon-to-be governor of the Bank of England, became the most senior central banker to praise an even more radical policy: targeting the level of nominal gross domestic product. Instead of having apoplexy, Britain’s chancellor said he wanted a debate.
Like most revolutions, it seems to come from nowhere but has deep roots. Like most revolutions, it holds the promise of great good but has the potential for harm. It is crucial that politicians and the public understand what this revolution in central bank thinking is and is not about.
“A revolution is impossible without a revolutionary situation,” said Vladimir Lenin, something of an authority in these matters. (A view from Lenin on recent monetary innovations would be interesting. “The best way to destroy the capitalist system is to debauch the currency” is another of his dainty little remarks.)
The past five years have led central banks to a revolutionary situation. When the crisis hit, they played their best moves, but to modest effect. Quantitative easing – the ugly term for buying long-term assets in order to drive down long-term interest rates – looks radical thanks to the many-zeroed numbers involved. In reality it is just another way to cut interest rates.
Monetary policy, and every other kind of policy, failed to engineer a strong recovery in advanced economies. Dissatisfaction with that outcome has led central bankers, spurred on by a healthy dose of external criticism, towards ideas that have been percolating in academia since Japan’s bubble burst in 1990.
Japan’s long slump drew attention to the vexing problem of what to do if you cut interest rates to zero and the economy remains in the doldrums. Mr Bernanke was vocal in that debate, along with economists such as Paul Krugman, Lars Svensson and Michael Woodford.
One option is quantitative easing. But there is another option: tell people that you will keep interest rates low in the future. If they believe you then it makes sense for them to borrow now. If rates are to stay low even after the economy recovers then why would they not?
Central banks are now pursuing that basic insight. The Fed’s new 6.5 per cent unemployment condition is a way to tell everybody that rates will stay low until the economy gets better. The nominal GDP target is a more drastic version of the same thing. In essence it combines growth and inflation into one number. Targeting this not only puts more weight on growth, it means promising to make up for low inflation now with more in the future – another way of saying the central bank will keep interest rates low.
That is what the central bank revolution is all about. What it is not about is permanently higher inflation. At his press conference, Mr Bernanke repeated three times that the Fed’s long-term inflation goal is 2 per cent, and that he meant it. Economists such as Mr Krugman have called on the Fed to seek higher inflation but its recent actions do not mean it agrees.
The danger is that politicians, grasping for salvation amid economic weakness, do not see the difference between a new policy tool designed to boost inflation when it is low and general acceptance that higher inflation is alright. The central bankers are like the only child in the neighbourhood with a new toy. Everybody wants to play with that toy. If they are not careful it will be wrecked.
Japan is in the greatest danger. Shinzo Abe, the man most likely to win this week’s general election and become prime minister, has called for unlimited easing by the Bank of Japan and a higher inflation target.
The BoJ has long protested – correctly – that it cannot fix the country’s economy by itself. But it has shown no urgency in working with others. It is no surprise that Mr Abe looks with frustration at what the Fed is doing, and decides that if the BoJ will not act, then he will have to force it. The European Central Bank wriggled out of a similarly precarious position when Mario Draghi, its new president, created a programme to buy eurozone debt last September.
That holds a lesson. The Fed’s new policy has risks – if it has misjudged the health of the economy inflation might kick in before unemployment falls below 6.5 per cent – but the decision to act was its own.
At the Bank of England, Mr Carney, having started a debate, will have to set out his answer for UK monetary policy. He surely knows the danger of crying “forwards” without making clear the direction in which to go.
This little revolution could end in the biggest improvement to economic policy since central banks cracked inflation in the 1980s. The prize is a new framework that tackles the zero interest rate problem in advance and thus makes future recessions less damaging. That framework might be the nominal GDP target – an idea we will hear more about in 2013 – or it might be something else.
The danger is that someone makes a mistake, triggers a lot of inflation, and discredits the work that Mr Bernanke and others have been doing. As Lenin put it: “It is impossible to predict the time and progress of revolution. It is governed by its own more or less mysterious laws.”

Robin Harding

Fonte: FT