Thursday, March 6, 2014

The Job Of A Central Banker

I have always said the ECB under Draghi has been a markedly different institute. But it still remains ECB, central bank to a disparate bunch of nations. Back in 2011 and 2012, when the US economy kind of hit the bottom, the Fed did not relent because it was stabilized. It chased with all-in QE to bridge the output gap. In Eurozone, the ECB admits the very high output gap and unemplyment rate. But still fails to act, as "medium to long term inflation expectation" remains "well anchored" 

The ECB perhaps suffers from too much of its own credibility. Ever since it took over the charge from the revered Bundesbank, the inflation expectation remained well anchored. Much in line with Goodhart's Law

 In a world where inflation is well anchored, is it anymore valid to have it as a policy target? Unlike the Fed and others, the ECB does not have any dual mandate. So legally it is bound to target price stability at the expense of everything else. But what about that generation that will be lost because their grandpas demanded price stability. What about human costs 

Any central banker at Draghi's place would be personally motivated to act. If he gets it right he will be a hero. If he gets it wrong, well, all other central bankers doing it anyways. And no, I dont expect any deflation in the Euro area. Unlike Japan in late 90s, inflation is more of a global phenomenon these days. So perhaps in the long run, whether the ECB acts or not will have no or limited impact on the Euro zone inflation  and inflation expectation. But the impact on the lives of thousands of unemployed or under-employed will be profound

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