Friday, January 20, 2012

20/1/2012: A view from ECB's airconditioned halls

I am sure you are all aware of this, but here is a chart on the euro area monetary aggregates:

Do you spot much of drama here? No? How about a snapshot?
No prizes for guessing an answer: there is no drama in monetary policy path chosen by the ECB through the entire period of August 2007-present. None. Which, of course, is surprising, as outside the euro monetary policymakers halls, there was and still is plenty of drama - from banks liquidity crunches, to sovereign debt crises, to sovereign deficits crises, to recessions and double-dips, to unemployment rising, to banks assets valuations crisis, to inflation falling out of sync with FX valuations, to sovereign credit crunches, to socialization of banks losses... and so on. All of the above should have an effect on a monetary policy. Some in less interventionist fashion (but with at least an ex post correlation to the aggregates), and some with more interventionist fashion (with monetary policy being a major tool for dealing with them).

Alas, all is calm, trend(y)-like in the well airconditioned offices of ECB.


Jason Loughrey said...

It might be worth putting up a graph of nominal GDP for the eurozone over the same time period.

Would be interesting to see the trend in the right-hand side of the QTM alongside the trend in M3 over the time period.

NAMAwinelake said...

If you drew the graph for the other monetary policy weapon - interest rates - the reaction of the ECB will be more pronounced. It brought rates down from 4% to 1%, and it might argue this managed to support M3. The ECB primary concern is price stability. Mind you there is no evidence to show British people are now using wheelbarrows instead of wallets, after GBP 300bn of new money (equal to 20% of GDP), and inflation which has been at 4-5% for some time.

Jason Loughrey said...


Yes, the interest rate can probably tell an interesting story as well. I was thinking in terms of growth in M3 having the capacity to offset declines in the velocity of money rather than images of wheelbarrows full of money.

It is also worth looking out for the effects of monetary tightening (and not just loosening) at critical stages just as the crisis emerged.

This is an easy graph to read.

One can see the climb in interest rates throughout 06-08, the declines in 09-10 and the increases in 2011.

The inflation rate trends are also interesting given that price stability is the target.

There is a clear problem in responding to inflation of different types. If the price increases are due to global food shortages (as in 2008), there is the strong possibility that a CB, with a price growth or price level target, will over-react to price increases.

The definition of price stability is a bit of a problem in itself.
Should the target be a price level target or a price growth target?

For this, it is probably worth keeping in mind our near neighbours.

The price level looks like it is being restored to the level that would have been expected prior to the crisis and may provide some respite for debtors that took out loans prior to the crisis. A longer time-series can be found elsewhere.

It is also worth returning to articles such as below that give some indication of thinking in the BOE and how it manages to control inflation expectations.

TrueEconomics said...

Great comments, guys. Keep them up.

I've done plenty of work plotting ECB policy on rates, linking to inflation etc. All say two things - inflation targeting is done decently well by ECB, but any other objective of the CB (including, obviously, banking system stability) is not served by its inflation targeting. The charts I posted say exactly the same - as I said, there's drama out of the captain's cabin window, but he's sipping champagne and steers the boat straight on the same course as before. If there wasn't an iceberg ahead, happy times. Alas, we know otherwise...