The Central Bank is trapped in the “Hall of Mirrors”


Pharmaceutical companies have patent portfolios, major navies have aircraft carriers, and central banks have their “standard” econometric models.

For decades, these normative models (all very similar) have proved that their decisions are based on a coherent philosophy, especially for central bankers themselves.

The industry does not want to be driven by a whim, eager to gain fads or micro-political conspiracy among the members of the central bank’s board of directors. It wants to be seen as encouraging productive investment and fair economic growth, not speculation.

Twenty years ago, it was generally believed that in the event of a financial collapse or an economic emergency, the central bank would act in an apolitical and selfless manner to keep the system functioning. In the post-assisted world, social inequality has increased, Transaction scandal The politicization of senior Fed officials and senior appointments has weakened public consensus.

Now, there is more cynicism. There are also deep suspicions that all post-crisis relief and “unconventional measures” have done to make the rich richer. The central bank has acquired a lot of financial assets, but it is losing public trust.

When entangled and challenged by politicians or journalists, central bankers will back down and recite what the normative model tells them. The stated goal of these models is to show what kind of short-term interest rates, asset purchase plans, or publicly stated “guidance” the economy needs to achieve the elusive “R-star” interest rate.

R star It is the real short-term interest rate consistent with full employment and long-term stable inflation. In terms of policy, that is the nirvana of the central bank governor.

It is not that R-star should be fixed or stable for a long period of time. If technological development or education levels increase fast enough to increase the potential growth rate of the economy, then stable interest rates should rise. Or, if productivity declines due to the plague or an aging population, R-star will be reduced.

If the R star can be easily observed at any time, the task of the central banker will be much simpler, such as on a page on a Bloomberg screen. These rates can be extracted and entered into the input fields of the specification model. Presto: Policy.

but not. R-star, the key interest rate, the magnet of central bank policy, is unobservable and can only be estimated by economists without direct empirical information to make wise guesses about what it should be.

Over the decades, these speculations have become quite frustrating. Since the 1980s, the R-star of advanced economies has fallen by more than 5 percentage points. Since the 2008 financial crisis, the R stars of the entire developed countries have converged to a very low level, as if waiting for an economic recovery that will never come.

Does the central bank signal to the private sector that growth is impossible, and does this frustrating and misleading belief reflect on the central bankers themselves?

Yes, according to Phurichai Rungcharoenkitkul, a full-time economist at the Bank for International Settlements in Basel.in a Paper He co-authored with Fabian Winkler of the Federal Reserve Board, and the two found that the central bank and the private sector “eventually mistake the macroeconomic impact of their actions for real information. They stared into the hall of mirrors.”

Rungcharoenkitkul and Winkler adjusted the standard policy model to prove that in recent years, “with the Hall of Mirrors effect, active policy strategies may not be effective in restoring expenditures, and worse, they may even exacerbate the problems that policymakers are trying to solve. . Come to solve it.”

In other words, by examining their recent policy reflections, the central bank has kept official interest rates too low for too long, and their communication of expectations inhibited long-term savings and investment in the private sector.

Unintentionally encouraged non-productive activities. Long-term setting of low interest rates leads to excessive housing prices, low class or labor mobility, and the growth of leveraged speculation.

We have always asked the central bank to take too much responsibility for economic recovery. We mistakenly expect them to know everything, even if they want the private sector to provide important clues.

Therefore, the “signals” and “communication” of the central bank can be said to have caused chaos and excessive long-term economic pessimism. As the Bank for International Settlements report said, “The more the private sector and central banks overestimate each other’s understanding of the economy, the more serious these consequences will be.”



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