“refocusing the ecb on output stabilisation and growth through inflation targeting”
DESCRIPTION
“Refocusing the ECB on output stabilisation and growth through inflation targeting”. Jörg Bibow, Franklin College Switzerland Delivering the Lisbon goals: The role of macro economic policy making 1-2 March 2005, Brussels, CES-ETUC. Inflation targeting [IT] – or not?. - PowerPoint PPT PresentationTRANSCRIPT
1
“Refocusing the ECB on output stabilisation and growth
through inflation targeting”
Jörg Bibow, Franklin College Switzerland
Delivering the Lisbon goals: The role of macro economic policy making
1-2 March 2005, Brussels, CES-ETUC
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
2
Inflation targeting [IT] – or not?
• Many observers view ECB as an inflation targeter by deeds even if not by words – this is wrong!
• ECB rejects IT and follows ‘two-pillar strategy’ instead, claiming that by delivering on primary goal of price stability it would thereby also fulfil its growth & stabilisation mandate – wrong too!
• What may be right though is that imposing IT upon the ECB could lead to both better growth as well as inflation performance in future.
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
3
ECB: Inflation targeter in disguise?
• Some observers believe that ECB’s interest rate policies (its ‘deeds’) have been much in line with what IT would have required (CEPR etc).
• In this view, ECB – for some reason – tries to obfuscate its IT approach; lack of transparency and bank’s confusing ‘words’ are regrettable.– That the ECB ‘allowed’ inflation to stay above two
percent for five years in a row is seen as evidence for flexible approach to IT and concern for growth.
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
4
Actually, ECB’s words & deeds do match – but are both inappropriate!
• From the beginning M3 pillar was meant to continue Buba tradition of hiding policy discretion behind pseudo-monetarist veil.
• From the beginning price stability pillar fully reflected another Buba tradition, namely that sound (‘stability-oriented’) monetary driver is quick in hitting the brake, but abstains from using accelerator – ASYMMETRY!!!
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
5
Why asymmetry worked for Buba
• Buba approach worked fine for Germany when nominal exchange rates [ER] were stable, trading partners’ inflation higher, and accelerator applied skillfully ‘elsewhere in the world economy’. Troubles emerged as partners’ inflated converged a/o
ER developments put spanner in the works.
• While lacking any skills & experience in properly managing the economy, Buba held a big success. Buba & Buba wisdom blueprint for Maastricht EMU!
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
6
What Maastricht meant
• To Germany – exporting Buba ‘success story’ undermined its working at home– Provoking deflation as Germany stubbornly goes old way …
• To Euroland – emulating Buba ‘success story’ = asymmetric ‘management’ of domestic demand– Mr Buba Otmar Issing represents this ‘culture’ 100%
• To rest of world – as German disease spreads rudderless economic giant drifts along hoping for strong enough export currents to pull it along– Global imbalances …
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
7
Understanding the current mess
• Neither ‘external shocks’ nor ‘structural problems’ are to blame
• Instead ECB’s asymmetric policies key to protracted domestic demand stagnationSeries of severe policy blunders
• Imposing IT upon ECB should stop it from reneging on its growth & stabilisation mandate, and lead to better inflation performance too!
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
8
What inflation targeting is all about
• Forward-looking: keeping tomorrow’s rather than yesterday’s inflation stable around target – ‘Inflation forecast targeting’– Symmetry – deviations in either direction unwelcome
• Inevitably, any short-term inflation forecast derived from forecasted evolution of economy.
• Effectively, IT means actively managing aggregate demand and employment, and thereby inflation – requiring skills & competence!
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
9
Bank of EnglandInflation targeting success story
• Publication of MPC’s forecast of inflation two years out – basis of policy & communication– Model of transparency & openness in all respects– Frequent & symmetric interest rate adjustments – Smooth cooperation with fiscal policy– Robust and fairly stable wage inflation
• Outcome: Very stable nominal (& real) GDP growth, high employment, and low inflationNB: UK’s problems relate to operating in the
immediate vicinity of stagnating economic giant.
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
10
IT not at all what ECB does! Revisiting ECB’s key blunders
• (1) Market opposition and the ‘euro puzzle’ • (2) Productivity slump boosts core inflation• (3) Stagnation pushes ‘Instability & Stagnation
Pact’ into reverse gear – ‘tax-push inflation’
• Result: ECB low on ammunition as strong euro prevents yet another free-ride on successful US demand management – euro area seems trapped in a vicious circle of its own making!
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
11
Blunder no. 1: Crashing the euro
• ‘Repeating a pattern observed in 1999 and 2000, monetary policy decisions and interest rate differentials [in 2001 too] appeared to influence exchange rates mostly through their effect on growth expectations’ (BIS 2002: 86).
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
12
• After nearly doubling policy rates within 11 months, thereby crushing domestic demand, ECB had trouble getting its foot off the brake (not to mention using the accelerator as aggressively).
• ECB’s ‘caution’ provoked severe productivity slowdown and corresponding rise in unit-labour costs and core inflationECB’s rear-mirror view meant more ‘caution’, and
hence more stagnation too ...
Blunder no. 2: ‘wait and see’
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
13
Business of keeping up margins!
Despite very low & stable wage inflation, ‘preemptive’ punishment of employees!
Wait and see as productivity slump pushes up core inflation
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Sources: Eurostat, ECB
annu
al p
erce
ntag
e ch
ange
s
negotiated wages
ulc (MA4)
core HICP
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
14
Blunder no. 3: ‘tax-push inflation’
• As ‘first line of defense’ (Koehler, IMF) fails, Buba fiscal wisdom kicks in with a vengeance
• Among ever more desperate but vain attempts at pro-cyclical consolidation, hikes in indirect taxes and administered taxes feature prominentlyConspicuous phenomenon: ‘tax-push inflation’
• This upward distortion in headline HICP is behind ECB’s astonishing failure on its primary goal!Clearest evidence on counterproductive macro
policies!
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
15
Reneging on growth may not pay offA central bank standing in its own way
Misses on ECB's primary objective in 2002-4 owe primarily to tax-push inflation
0
0.5
1
1.5
2
2.5
3
3.5
Source. ECB, EurostatNote. Taxes on tobacco products and measure of administered prices within the services sector (aggregate HICP weight of 5.6%) included here most likely underestimate true tax-push inflation.
Ann
ual p
erce
ntag
e ch
ange
s
headline HICP
HICP excl. tax-push
ECB ceiling
0.7%
Mind the gap!‘tax-push inflation’
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
16
Monetary & fiscal policy interaction à la Buba/Maastricht
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
17
What proper inflation targeter would NOT do:
• Misread & provoke markets so that currency crash pushes inflation up
• Carelessly & needlessly provoke productivity slump that pushes inflation up
• Ignoring stagnation and unemployment since resulting fiscal squeeze pushes inflation upEven for the sake of maintaining price stability itself
proper inflation targeter has an interest in sustaining growth & employment, and thereby low inflation.
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
18
IT and wages – two cases• (1) Wages responsive to economy – both ways!
– Implies linear (upward-sloping) supply curve– This should go with relatively higher inflation target
• (2) Wage inflation unresponsive to economy– Implies nonlinear supply curve (with flat range)– Wage rigidity provides safeguard against deflation,
allowing a relatively lower inflation target. Keynes (1936, ch. 19) argued that case (2 – stable wage unit) actually
makes it easier to run stabilising monetary policy.
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
19
Euroland: Stable & (too) low wage inflation – and asymmetric MP
Output & employment costs due to two factors:
• (1) price ceiling (‘below 2%’) may be too low
• (2) interest-rate policies asymmetric and systematically misguided VERY ‘forward-looking’ on output recovery & inflation risks
Complacent about slump and deflation risks
• Anti-growth bias even costly in terms of inflation Inflation above two percent for five years is really a miracle!
• Employees/consumers hit by double-whammy!!!
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
20
Perhaps better end this folly?
J Bibow, Franklin College ETUC, Brussels 2 Mar 2005
21
So what to do about it? Structural reform!
• (1) institutionsEnd antiquated Buba-style central bank independence,
i.e. ‘Unbounded discretion’ & despotism in MP• Both undemocratic & economically inefficient!• Bank of England may serve as model of CBI
Impose IT upon ECB!
• (2) personalitiesEnd series of ‘accidents of personality’(MF) in FrankfurtSelect central bankers who are willing and able to
MANAGE the economy and thereby inflation, since that is what is required – inevitably!
– Please refer to www.levy.org for my research working papers on EMU.