In defence of the RBNZ’s upcoming hike

Although I no longer have the time to keep up with the literature on financial stability policy (and so am not commenting on it – this is due to my switch to detail income data analysis), I still spend a bunch of time looking at the national economy and monetary policy.

I see that a section of my work place thinks we need the RBNZ to be more hawkish than it is.  There are also many people who think lifting soon is madness.  I am not personally not in either camp – I actually think the Bank has got this right now!  The Bank’s decision to lift soon and get rates back to neutral does make sense given what they are facing, and that they are doing it the right way.

[As a disclaimer, I was more hawkish than the Bank during the crisis (I was wrong) - although my forecasts of economic variables were surprisingly accurate then, that was because their actions were more appropriate, not because I had any foresight ... another indication of why forecast performance isn't always the best judgment variable ;) .  From late-2011 until the end of 2012 I was more dovish than the Bank was.  Now, I find their discussion consistent with my own narrative and models - including the discussion of the risk.  So it is hardly surprising I'm so willing to defend them :) ]

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Does the BoE’s view on uncertainty make sense?

Uncertainty is an unavoidable element of policy decisions. In the words of the great Donald Rumsfeld, we must confront the unknown unknowns. In this appearance the BoE’s chief economist, Spencer Dale, discusses his approach to dealing with uncertainty in the context of forward guidance. Essentially, he says that the Bank doesn’t know how big the output gap is so it has been cautious with forward guidance. He suggests that any other course of action would risk pushing up inflation expectations.

His view is understandable, given the Bank’s inflation target, but it is probably not optimal for the UK. Read more

Bleg: Grimes on bubbles

Arthur Grimes recently gave an interview to Reuters, all I’ve seen so far is this write up via Raf on Twitter (cheers).  Now Grimes is an incredibly good New Zealand economist, to put things in perspective I would generally put more weight on a single line of his opinion of something than I would on my own intuition and analysis of issues – an given that as individuals we are strongly biased towards our own views that is pretty significant.

But anyone who reads TVHE knows what I’m like, I just really really want to know ‘why’ certain things are being said!  I emailed a few economists and some suggested I do a bleg asking, so why not!

In the Yahoo story there are a couple of segments I’m a touch confused on and I’d like it if someone could answer them for me :) (Note:  Seamus from Offsetting offers some example answers at the bottom of this post)

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Central bankers are the modern storytellers

Anyone who’s followed TVHE for a while will enjoy Gillian Tett’s discussion of the skills needed by central bankers:

Rather than operating the controls, moreover, central bankers also try to control economic outcomes by using words, not merely to influence price and interest rate expectations but to shape the mood. Thus the seemingly dry ritualistic texts that are issued each month – and supplemented by sober speeches – no longer merely describe policy; they are creating it too. Words are the weapon.

[It] suggests that we all need to spend more time reflecting on the implicit social contract and cultural messages in central bank statements. …The next Fed chair needs to be a masterful storyteller and cultural analyst, who can read social sentiment, shape norms, (re) create trust and persuade us all.