From this newspaper story it's hard to tell what went at the BIS meeting of the central bankers. Inflation targeting. Direct support of the prices of assets other than overnight reserve deposits. But it's hard to gauge when or if there will be real changes in central bank operating procedures.
Posted by DeLong at June 29, 2003 07:18 PM | TrackBackTop central bankers eye slow growth, deflation - Jun. 29, 2003: BASEL, Switzerland (Reuters) - Central bankers from around the world Sunday discussed ways to prevent deflation and kick start lackluster global growth, including unorthodox policies such as buying up financial assets. At an annual meeting of the Bank for International Settlements (BIS), bankers grappled with mounting concerns that falling prices in top industrialized nations could spiral into a deflationary cycle that undermines growth.
The strategies under discussion included setting specific targets for inflation rates as one way to prevent deflation from taking hold in advanced economies outside Asia.
Designing monetary policy to achieve a targeted inflation rate can be helpful not only to moderate price pressures, but also to boost prices when they fall too low, some said. "Everybody was very confident about it," Gordon Richardson, former Bank of England Governor, told Reuters after the closed-door session.
"It was a theoretical discussion without any sharp corners," said Matti Louekoski, deputy governor of the Bank of Finland.
According to several central bankers attending the discussion, Federal Reserve Chairman Alan Greenspan said measures once considered unorthodox might become conventional, such as buying financial assets. "We used to watch only commodity prices, exchange rates and interest rates, but now it seems we also have to examine or monitor asset prices," said one...
I don't think I'm breaking the Official Secrets Act by hinting that one shouldn't rule out the answer "bugger-all".
Posted by: dsquared on June 29, 2003 11:21 PMWell, if you're going to be buying assets like bonds (and stocks?) to prevent their prices going down, presumbably the flip side of that is that you're to be selling them to prevent their prices going up. This sounds an awful like a state-controlled economy to me. Or am I missing something?
Posted by: Andrew Boucher on June 30, 2003 12:52 AMAndrew Boucher,
State control? To an extent, yes, but that is always the case to some extent. Relevant questions are, to what extent and to what end? If the Fed were targeting asset prices, that would be a huge worry. However, if one places strong reliance on monetary policy to maintain growth and stabilize prices, then handn't you better have some monetary tricks up your sleeve when you run out of basis points for conventional policy?
Now that long-run central bank policy is going to be symmetrical (the decades long inflation fight has become a fight for steady, rather than falling, inflation), a search for new tools is hardly a surprise. Central banks have engineered themselves into a position of relative weakness, given conventional tools.
Is there worthwhile trado-off between stronger automatic stabilizers and less reliance on monetary policy? Why are we talking about more stimulative tax policy 10 quarters or so after growth fell off the path? Shouldn't the fiscal mechanism for righting the economy operate without political action? That could help keep us out of situations in which central banks might need to by stocks or bonds.
Given that the cost of low inflation seems to be greater limits the effect of conventional monetary policy, it seems a pretty good idea to discuss limiting recessionary risks in other ways. Remember that notion Rubin urged on the IMF and national governments to look into improving international surveillance and to undertake some financial restruturing to cut down on the risk of financial shocks? Seems an even better idea if the Fed is now less able to ride to the rescue.
Posted by: K Harris on June 30, 2003 06:31 AMI find this fascinating. Greenspan used to talk about "irrational exuberance" for the stock market. He apparently didnt have a clue that injecting liquidity (dropping money) into the market might change the price of something besides the CPI.
With the big clue of real estate price increases after Fannie and Freddie injected huge amounts of liqudity, maybe Greenspan and the government will acknowledge that M1-M3 and interest rates are not not the only levers on prices.
Posted by: Chula Vista Dave on June 30, 2003 09:41 AMI'm a non-economics student who is interested in economic matters. I still don't understand why "mainstream" economists are so convinced that it is necessary to prevent deflation, as if the beginning of it will necessarily lead to all consumers and businesses deferring all purchases indefinitely. Here's a piece that encapsules much of what I think seems obvious, can someone tell me what it gets wrong?
http://www.mises.org/fullstory.asp?control=1241
(I know it gets wrong that the economy will grow because businesses will become more efficient, as too-high productivity growth is already precluding drops in unemployment, but how is the basic idea wrong?)
Thanks
--James S. W.
Posted by: James S. W. on June 30, 2003 09:45 AM1) The Fed injected a good deal of liquidity into the economy in view of Y2K. That liquidity, apparently, found its way into stock market margin accounts. Did the Fed have a clue about its role in the 2000 bubble ?
2) What should one make of Merrill Lynch strategist Richard Bernstein's contention that only higher interest rates would stave off the issuance of convertible bonds presently increasing corporate debt, avoiding bankruptcy and pushing the consolidation of enterprises, necessary to mop up overcapacity, farther into the future ?
ricardo
Posted by: lauren sedofsky on June 30, 2003 11:24 AM