So it looks like it will be one trillion euros in QE, somewhat more than the markets expected. A few comments:
1. The policy would have been far more effective if done a year or two ago. It will still be somewhat effective, but not a game changer. Think “less bad times” in the eurozone, not good times. Greece might still blow up.
2. The euro fell by 1.2% on the news. Of course QE was widely expected and presumably some of the recent decline in the euro was due to expectations of QE. Even so, it doesn’t seem like a very strong reaction to a bigger than expected number, so I’d expect only a weak impact on eurozone inflation (or deflation.) Still, better than nothing.
3. The US stock market rose on the news, another example of “never reason from a price change.” If the dollar had strengthened because of tight money in the US, stocks would have fallen. If the dollar strengthens because of easy money in Europe, stocks rise. The 147th example of the fallacy of the “beggar-thy-neighbor” theory. (However this theory does apply to national fiscal policy in the eurozone. Thus if Germany does fiscal stimulus in 2011, then the ECB must tighten even more to keep inflation on target, and the PIIGS see their GDP fall.)
4. This is further evidence that the recent Swiss move was unwise. Some of Switzerland’s defenders (at least in my comment sections) claimed they had to cut their tie with the euro, as the value of the euro would collapse after QE was announced. It’s down only 1.2% today. Contrast that with the capital losses suffered by the SNB due to a 21% appreciation of the SF.
5. Tyler Cowen has a new post on deflation. I’m going to quibble with a couple aspects of the post. First the title; “Why is deflation continuing in Europe and Japan?” I don’t like the idea of using that title in a post where the very first paragraph points out that the BOJ has succeeded in moving Japan from deflation to inflation:
Consumer prices will rise an average 1.4 percent the fiscal year through March 2017, after failing to reach 2 percent “” stripped of fresh food and a sales-tax boost “” in any of the years since the goal was set, the median of 16 estimates shows. Governor Haruhiko Kuroda wanted to get there in about two years when he unleashed his record stimulus plan in April 2013.
I also don’t like this:
We are no longer at the point where two percent inflation is easy to achieve in Europe or Japan. Central banks are doubted. To achieve two, they would have to shoot for four, and thus announce a target of four.
That’s also Paul Krugman’s claim, but it’s false. They could target TIPS spreads at 2%, for instance. Better yet, they could follow Bernanke’s advice and switch to level targeting. I think the mistake many observers make (including Cowen and Krugman) is to see central banks struggling to hit their targets with their actual policies, and then assuming that it is technically difficult to do, or involves a large risk of overshooting. That is to give central banks too much credit. Central banks are still back in the Stone Age with their QE-type policies. As Bernanke pointed out years ago, and Woodford has confirmed, you need level targeting at the zero bound. This would make it far easier for the ECB and BOJ to hit their target. Real world central banks are not using best practices.
One place I do agree with Tyler is that it might be very difficult in a political sense. Thus even if Draghi and Kuroda privately favor level targeting, it’s quite possible that they would be unable to convince a majority at their respective central banks. So yes, in a narrow political sense it might be tough for a central bank head to do what is needed to succeed.
Politics in a broader political sense don’t matter, as everywhere in the world voters are clueless about central banking. If the ECB switched from a 1.9% IT to a 1.9% PLT, the average European would respond “huh?” Even most college students don’t know the difference between a change in inflation and a change in the cost of living.