Forget the € and demand management!

The title of this post is a bit exaggerated, yet it helps stressing the gist of the point I want to make: policy makers, market participants and ordinary citizens should start devoting less attention to the € and to demand management and should concentrate, instead, on supply issues.

Let me expand a little this basic idea.

Who said what on the euro?

The euro and Nobel prizes

The contemporaneous award of the Economics Nobel prize to Eugen Fama and Robert Shiller, who have reached quite opposite conclusions on the ability of financial market to always generate prices consistent with economic fundamentals, has, in some quarters, raised doubts about the wisdom of those who decide the Nobel prizes. These doubts are at least late and probably wrong.

Don´t supply more when there is no demand!

Over the last few weeks the words uttered by the ECB President, first in front of the European Parliament and then in the latest press conference,  according to which the ECB is: "ready to use all available instruments, including a LTRO (longer-term refinancing operation), to ensure that developments in short-term money market rates are in line with our medium-term assessment of price stability." have attracted a lot of market attention.

German elections ‘positive for the euro’

Whatever the coalition outcome, Germans back the single currency

[Published today in  the OMFIF Bulletin]

Has Bernanke provided a helping hand to Draghi?

In a previous post I stressed the tug of war between the Governing Council of the ECB and the money market: the former has a unanimous intention to keep the monetary policy stance constant or looser, the latter seems well poised to increase interest rates.

In this tug of war, Bernanke has been seen by some as having started to pull on the ECB side with the utterly surprising Federal Open Market Committee (FOMC) decision not to "taper" the 85 billion of monthly purchases of bonds by the FED.

Upward bias vs. downward bias: who will win?

ECB President Draghi confirmed, at the last press conference on September 5th, the unanimous view of the Governing Council: “we wanted to make it clear that we have a downward bias in interest rates for an extended period of time.“ He also said that “The Governing Council confirms that it expects the key ECB interest rates to remain at present or lower levels for an extended period of time. “

A China-USA monetary Union?

Much has been made, while discussing the euro-area crisis, of the fact that countries using the euro have lost the ability to correct their imbalances through changes in nominal exchange rates. So, taking the most extreme example, Greece could not devalue its exchange rate towards Germany to deal with its imbalances. The statement is of course correct, but needs three qualifications.

“Forward with forward guidance!” OR “Much ado about nothing?

Many central banks in advanced economies have engaged in some form of forward guidance. The latest to tread this path was the Bank of England, which was preceded by the Reserve Bank of New Zealand, the Bank of Japan, the Fed, the Norges Bank, the Sveriges Riksbank, the Czech National Bank, the Bank of Canada and the European Central Bank. Also the Swiss National Bank has lately, if somewhat implicitly, had recourse to forward guidance.

Hurray, a crisis!

The European phase of the Great Recession that started in May 2010 has produced huge damage: ask unemployed youngsters in Spain, the Exchequer in Ireland, banks in Italy and about everybody in Greece. There are two categories of people, however, that could welcome it: economists and naïve Europhiles.

Is the ECB a central bank overburdened with risk?

The short answer is: yes, but not of the kind you think.

The long answer starts by noting that in some quarters the financial risk coming from unconventional monetary policies is advanced as a reason for more caution (or cowardice?). For instance, the Bundesbank in the document on the OMT presented to the German Constitutional Federal Court gave quite some weight to this issue [1].