Draghi post mortem

Draghi’s press conference today left many questions hanging in my mind. Here are a bunch of disjointed responses, recapping on tweets earlier today.

Why didn’t he mention an amount in announcing the start of purchases of private sector assets? Is this because, actually, and as Frances Coppola has intimated, there won’t be a large enough quantity of eligible assets to make it sound like a policy that will really work?

It seems likely this announcement is coloured by what the German constitutional court would view as the ‘fiscalness’ of ECB policies. Buying private sector assets is ‘monetary policy’, in this topsy-turvy world. Doing familiar QE – buying government securities – is fiscal policy, and to be avoided. Note that in the UK, former Governor Mervyn King and others rejected buying private sector assets precisely because this would be seen as fiscal policy, which is properly the concern of the UK Treasury. In the end, these distinctions, as I have blogged in the past, are hard to make concrete.

One presumes that the inflation forecast was not conditioned on any asset purchase program. At a time like this, it would have been great to have one to compare including such a purchase program, so we would know not only it’s size, but the anticipated effects on the ECB’s goal variables. Then we could monitor what the ECB intended to do, and what it intended to do if the economy did not develop, or the purchases did not have the same effect, as anticipated.

It’s a real shame that Draghi feels forced to mention ‘structural reform’ at every turn. At one point he commented that monetary and fiscal policy alone cannot fix Europe. On the contrary, monetary and fiscal policy can fix what the ECB is mandated to care about, namely the possibility that inflation will stray forever below target (and, at a generous interpretation, that the output gap will be negative for a long time). Potential output is the concern of member states and the EU, not the central bank. In fact, as I and others have commented, seen through the model that the ECB itself uses to forecast, structural reform may be deflationary, since it increases output relative to potential, making the output gap more negative. Really all this does – aside from keeping the German ECB board members and politicians onside – is to inject negative noise that reduces confidence in future inflation and real activity in the Euro Area. Imagine the response if Mark Carney said ‘We can’t fix UK secondary education with monetary and fiscal policy alone: we need educational reform.’ Or ‘we can’t fix crime with monetary and fiscal policy alone: we need criminal justice reform.’ How silly it would sound. But this is not really much different from what Draghi said.

It’s frustrating that he and other central bankers fling the word ‘anchored’ around when discussion inflation expectations. What does it mean? If expectations were always equal to target, would that be such a good thing? What if the economy suffered persistent under and overshoots of the target, through no fault of the central bank. Would we wish that private agents nevertheless assumed inflation expectations would always be at target, and suffer the forecast errors? Is this meant to refer only to the fact that longer term expectations are not at target, when the ECB itself expects inflation at that horizon to be at target? If so, then one needs a clearer discussion. We need to understand what the ECB is assuming about why private participants don’t share their own view. Is it that they use a primitive method of extrapolating past inflation to forecast the future? Or do the ECB think that private participants are guessing the economy is in a worse state than the ECB itself think? Or that policy instruments will not be used as has been promised, or will not have the effects the ECB are assuming? And how are the ECB assuming that this world view different from theirs will develop such that the ECB itself can still forecast inflation to be on target eventually?  Is the ECB assuming that everyone comes to share their own world view?  If so, how and why?  Or is the forecast projected on a policy loose enough to compensate for the fact that private expectations stay ‘too low’ and to bring inflation back to target nonetheless?

Draghi mentions that there was not unanimity on the Governing Council regarding this announcement [whatever this announcement amounts to]. Some wanted more stimulus, some less. But if so, what did they want? By how much did it differ in size and nature? How were these minorities outvoted? 1 person 1 vote, or was it weighted by GDP? Are any members allowed a veto on any issue? Do Executive Board members count the same as Governors of member state central banks?

That the ECB cut rates again caused me to reflect on the fact that the UK’s MPC had chosen back in 2008 that the floor of rates would be 0.5%, higher than both the Fed and the ECB. I wonder: does the fact that these other central banks have gone lower without disaster cause the MPC to reflect on whether, if they needed more stimulus from some source, they could cut rates themselves?

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