There are two types of central bankers . . .

Those who “get it” and those who don’t.  Commenter James of London sent me some interesting information on how Mark Carney is doing:

He’s certainly flexible. Before arriving in the job, but after the appointment was announced he made the speech mentioning NGDP targeting being interesting. In itself it caused a monetary easing in the UK, but I detected a lot of very ruffled feathers in the UK amongst the important people, and those on the MPC who were very keen to emphasise their independence.  The important people got a study commissioned by the Treasury into monetary policy targets that proceeded to inelegantly kill the idea of NGDP targeting and reinforced the status quo view of Inflation Targeting.

On arrival in the job he found his MPC stuffed full of internal and external (independent) dyed-in-the-wool Inflation Target’ers (“Ceiling’ers”). So, he pinned them down to a new idea of forward guidance, but couldn’t chose the right target and had to compromise on unemployment as a main trigger.  When unemployment fell more quickly than expected he broadened the range of triggers, including wage growth.

Now things are looking better as both unemployment and employment do better than expected he has focused on average wage growth. Average wage growth is important as it captures the huge mix changes taking place in the UK labour force, that in turn explains the paradox of rapidly rising employment and no average wage growth. The market recognises it very clearly as shown by the reaction to average wage growth numbers and the latest Inflation Report.

Section 4.3 on page 33 and the box on page 34 is a specially commissioned investigation into the complexities of measuring wage growth. Although some surveys like that from the Recruitment and Employment Confederation provide headlines for very robust pay growth, this is not the same as average wage or income growth. And the “robustness” is only relative, the growth they refer to is merely back up towards the more long run normal pay growth of 3%-4% rather than the job destroying 0% seen during the worst years of the recession.

At the same time, he has managed to change the MPC too. A number of internal members have retired or been forcefully moved (eg the former Chief Economist Spencer Dale, who is now leaving the Bank of England altogether), and a few external members have reached the end of their terms too, allowing Carney to appoint more open minded people, many with more international experience.

All very exciting, and great news for the young and unemployed, and the employed. The number of young jobless fell by the biggest number “since records began in 1992″. It’s also great news for immigrants, who are clearly not taking British jobs, but making them. No reputable economist would have predicted the big increase in immigrant workers and a rising participation rate. That is the wonder of a good, right, monetary policy.

Britain is starting to catch up to Germany in the jobs/growth stakes.   Some people who are sympathetic to my ideas wonder why I wasn’t tougher on Ben Bernanke.  Perhaps because I see his role as being similar to Carney’s—pushing the Fed to move as far as he could, given the institutional inertia.  At the other extreme you have the ECB, and also the new head of the Indian central bank:

David Glasner has a field day talking about these comments by Raghuram Rajan:

Reserve Bank of India Governor Raghuram Rajan warned Wednesday that the global economy bears an increasing resemblance to its condition in the 1930s, with advanced economies trying to pull out of the Great Recession at each other’s expense.

The difference: competitive monetary policy easing has now taken the place of competitive currency devaluations as the favored tool for playing a zero-sum game that is bound to end in disaster. Now, as then, “demand shifting” has taken the place of “demand creation,” the Indian policymaker said.

Let me just add that I doubt you’d find any serious scholars of the Great Depression who would agree with Rajan, Keynesian or monetarist.  In particular, Ben Bernanke would be horrified by these views, and indeed I recall he had a debate with Rajan a few months back on a related point. Ditto for Christina Romer, Barry Eichengreen, and even Milton Friedman, if he were still alive. Rajan (who was a brilliant finance professor at Chicago) has too much of a finance view and not enough of a macro view.  India should have put him in change of regulating India’s banking system (a job he’d be great at), not running monetary policy.  (Perhaps his current job is both–but that’s asking a lot of one person.)

I no longer have time to post on all the great stuff that is sent to me.  Marcus Nunes has a wonderful post criticizing Frederic Mishkin for adopting what you might call the “interest rates reflect the stance of monetary policy” view, just a few years after the very prescient warning he gave the Fed at his last FOMC meeting, in 2008:

What I’d like to spend some time on””because I feel this is sort of my swan song, but maybe because I’m a classy guy, I’ll call this my “valedictory remarks”””are three concerns that I have for this Committee going forward. I’m not going to be able to participate, but I have a chance now to lay them out.

The first is the real danger of focusing too much on the federal funds rate as reflecting the stance of monetary policyThis is very dangerous. I want to talk about that.

HT:  David Levey

Kevin Erdmann is becoming a must read blogger, and has some very interesting observations about a recent study of home ownership and unemployment:

It is strange to me how difficult it is for us to imagine that, on the margin, some workers might have discretion about the duration of their unemployment.  Here is an article on the effect of homeownership on unemployment duration. (HT: EV)  They find that homeowners with mortgages have unemployment behavior more similar to non-homeowners.  The extended duration and the tendency to exit the labor force come from homeowners with high equity ownership.  Yet, oddly, they seem to stick with the explanation that homeowners are less mobile and are tied to limited labor markets.

To me, this finding obviously comes from the fact that high equity home owners have more savings, more discretion, and more flexibility about how to re-enter employment or about making work-leisure trade offs.  I don’t see any mention of this obvious factor in the paper.  We all know people who have discretion in their labor force decisions.  Why do they disappear when we start thinking about the big picture?



19 Responses to “There are two types of central bankers . . .”

  1. Gravatar of Benjamin Cole Benjamin Cole
    17. August 2014 at 05:55

    That is fascinating about the Bank of England…institutionally, does the BoE cater more to the Chief than the Fed? Is the BoE more flexible than the Fed?

    That is, is Yellen part of a more-hidebound shop due to institutional rules, heft and norms?

    Can Yellen recast Fed’s platoons of economists? (They have 700 or so). Is she obligated to “seek consensus” or can she get out the long knives? We saw Kocherlakota in Minnesota turn his shop around.

    Yes, the blame lies still with Obama, who seems to regard his central bank with passing curiosity, if that. Although when was the last time we had a US President who was well-versed in Fed policy?

    We could blame Bush jr. for having the boobs on the FOMC who tightened us into the Great Recession.

    It probably makes sense to move the Fed into the Treasury Department, and have it report to the Secretary, and execute policy to Treasury Secy’s specs.

  2. Gravatar of Vaidas Urba Vaidas Urba
    17. August 2014 at 06:48

    Krugman is right in saying that the ECB “gets it”:

    “The thing is, I don’t believe that current management at the ECB is that different in its understanding of what policy should be doing from leadership at the Fed.”


    “The good news is that the ECB does, I think, understand the problem.”

    Links are here:

  3. Gravatar of Ben Ben
    17. August 2014 at 07:48

    Young people in the UK are worse off since Carney came because house prices have gone up whilst wages are stagnant. Bankers win again.

    The UK prints via housing instead of wealth creation.

  4. Gravatar of Brian Donohue Brian Donohue
    17. August 2014 at 09:35

    Excellent blogging.

    Erdmann is very good. I thought this was the best part:

    “Labor costs are interwoven with all the other inputs of production, so that this temporary disequilibrium not only prevents able workers from quickly reintegrating into the productive economy, it distorts and seizes up decision making across the economy through the destruction of information. This is an informational and coordination problem.

    This seems like an important problem for economists to discuss, but, at least out here in the blogosphere, we’ve got left-wing economists who would find it difficult to accept a framing that has a possible conclusion that wages are too high, and right-wing economists who would question a framing that says the central bank is too tight. Because of these constraints, the topic seems generally ignored.”

  5. Gravatar of W. Peden W. Peden
    17. August 2014 at 14:01

    There was a figure in the London Times recently: France and Germany are up about 17% in RGDP since 1999. Britain is up 30%.


    Wages have risen faster than they would have without monetary easing, and the current figures are distorted by the winding down of the City bonus culture.

  6. Gravatar of W. Peden W. Peden
    17. August 2014 at 14:02

    In fact, the recent fall in wages would have been a rise if you rule out bonuses.

    Bankers’ big score was the bailouts, not the monetary easing.

  7. Gravatar of ssumner ssumner
    17. August 2014 at 14:05

    Vaidas, Krugman has agreed with me over the past 6 years that the ECB has been utterly incompetent. In those posts you link to he still stays ECB policy is really bad. Perhaps he talked to someone there who told him off the record that they understand the problem within the ECB but can’t do anything because of the Germans. I don’t know. But all I can do is look at their policies and public statements, which are both utterly insane.

    For example, they’ve made statements that deflation can be healthy because it makes economies more competitive. This in a region that has had 0.8% NGDP growth rates for 6 years!

  8. Gravatar of Ben Ben
    17. August 2014 at 14:22

    “Wages have risen faster than they would have without monetary easing, ”

    How can you prove this? If we’d collapsed housing costs wages would have gone up *loads*. Wages are worth nothing now in the UK all the young have is enough to pay the interest on their landlord’s mortgage but he doesn’t care because he’s in it for the asset appreciation.

    Saving the banks was a disaster. As was getting into that situation to begin with. Everything since has been about preserving that new hellish status quo.

  9. Gravatar of Major_Freedom Major_Freedom
    17. August 2014 at 14:51

    The only real difference between NGDPLT and IT is that IT would cause booms to end more quickly and with a less painful recession, since it would be less inflationary during a correction. NGDPLT would cause booms to last longer and generate a more painful recession, since it would be more inflationary during a correction.

  10. Gravatar of W. Peden W. Peden
    17. August 2014 at 15:03


    Because SRAS curves slope upward, and so a boost to nominal wages when the economy is not at the LRAS level will boost real wages ceteris paribus.

    “If we’d collapsed housing costs wages would have gone up *loads*.”

    Why? Wages are prices too.

    “Wages are worth nothing now in the UK all the young have is enough to pay the interest on their landlord’s mortgage but he doesn’t care because he’s in it for the asset appreciation.”

    I don’t think this discussion is interesting if it’s full of hyperbole.

  11. Gravatar of Ben Ben
    17. August 2014 at 15:06

    “If we’d collapsed housing costs wages would have gone up *loads*.”

    > Why? Wages are prices too.

    Wages are relative to the cost of living. If housing tanks we have more left over even if wages are static. Housing is *the* problem.

    Your use of a Latin phrase to express a concept that could have been made in plain English speaks volumes.

  12. Gravatar of W. Peden W. Peden
    17. August 2014 at 15:42


    Actually the main point of the phrase is to avoid speaking volumes.

    Why would wages be static? Even if wages are sticky, unemployment rises, and so the average wage for everyone (not just those in work) falls.

  13. Gravatar of W. Peden W. Peden
    17. August 2014 at 15:42

    * Static in the event of an AD shock.

  14. Gravatar of Ben Ben
    17. August 2014 at 16:03

    We could have a rise in *gainful* employment in the UK with a huge change in ownership and use of land. The UK has many employed doing absolutely nothing of use at best or at worst counter-productive rent extraction.

    My original point. Wages have *fallen* outside of the nonsensical world of economics where housing costs don’t enter into the equation. The young are further from financial independence than ever.

    If housing fell 50% and wages fell 10-15% we’d be way better off. House prices are detached from wages. The UK is a dreadful place for the young.

  15. Gravatar of Kevin Erdmann Kevin Erdmann
    17. August 2014 at 22:23

    Ben, housing costs have not been especially high. Housing prices have, but rents and mortgage payments have not been, at least in the US. Places where monetary policy decimated home prices since 2006 have not had exceptionally positive outcomes.

  16. Gravatar of Saturos Saturos
    17. August 2014 at 23:04

    Scott needs to be clearer still. The notion that NGDP is a pure nominal variable which is nonetheless more “real” than RGDP, as it is directly determined by monetary forces (“monetarist aggregate demand”), which isn’t just the product of P and RGDP but rather that P can be determined as NGDP (AD) and potential RGDP/wage stickiness (AS) interact – this is still not getting through to observers of MM.

  17. Gravatar of Joel Aaron Freeman Joel Aaron Freeman
    18. August 2014 at 00:55

    Good on Market Carney. If England ever adopted a formal nominal wage growth target, that would be WAY better than an inflation target. Hope they do.

    Saturos, it looks the Monetarist that he’s quoting was sloppy with his wording. If he’s sloppy, it’s inevitable to be misinterpreted. He said:

    “One can obviously imagine that the Italian output gap can be closed without monetary easing from the ECB. That would, however, necessitate a sharp drop in the Italian price level (basically 14% relative to the pre-crisis trend – the difference between the NGDP gap and the price gap).”

    What he should have said is:

    “If inflation is consistently 2%, then it will eventually compensate and correct for the 14% collapse in RGDP, but it’s going to take a really, really, really, really long time.”

    Best thing to do in these situations is to suggest an edit to make it clearer.

  18. Gravatar of James in London James in London
    18. August 2014 at 01:26

    Benjamin Cole: The MP for the City of London believes, somewhat incoherently, that there is in fact a “conspiracy” between the government and the central bank to keep rates low. For the sake of good governance it would be better to make it public, if true, which I doubt. But who cares really if it gets us to the right place.

  19. Gravatar of ssumner ssumner
    18. August 2014 at 04:24

    Saturos, I think the people who follow my blog get it by now. Those that don’t will often misinterpret the message.

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