Analogy: imagine the head of a retail bank giving an interview from a swanky office: ‘know what? there’s hardly any of your money actually left in the bank! We’ve loaned it all out to people! And we don’t know if we are going to get it back! We just have to hope that not too many of you come at once to get your cash, because if you do, we are sunk!’
Other central banks have been much more circumspect. They understand the game the BoJ are playing. If expected future inflation rises, real rates fall, which encourages spending and the inflation today that will validate the increase in forecast inflation. But they have also conducted event and time series studies of the impact of Quantitative easing; and poured money into conferences investigating its possible mechanisms. They stress that there is an underlying process that will generate stimulus, and know that it is dangerous to call forth expectations of success if there is nothing behind it all.
Bernanke joked that Quantitative easing is a policy that ‘works in practice, but it doesn’t work in theory’, downplaying doubts that he would have had with his academic hat on about what can be read into ‘working in practice’ without a convincing story [‘theory’].
The BoE, as I have written before, on many occasions put an over-confident gloss on their view of the effectiveness of Quantitative easing. Draghi, seeking to convince markets to stop believing that Spain, Portugal and even Italy might leave the Euro, and have their debts redenominated, said that they would ‘do whatever it takes’, in the form of literally unlimited purchases of short-term debt. He could not have meant what he said, because there was surely no support for exposing EU tax-payers to unlimited corresponding losses.
Draghi, seeking to convince markets to stop believing that Spain, Portugal and even Italy might leave the Euro, and have their debts redenominated, said that they would ‘do whatever it takes’, in the form of literally unlimited purchases of short-term debt.
But imagine what would have happened if he’d said ‘please, let’s just hope that the Euro stays together. Let’s just hope that someone does whatever it takes, whatever that might be.’
Koruda might be right. He might even think that he might be right. But if he does, he should keep it to himself, and keep polishing the emerging narratives about how Quantitative easing might work, and putting aside some of the associated seigniorage for those research conferences.
Tony Yates is the professor of Economics at the University of Birmingham and teaches International Macroeconomics.
Featured Image Source: Reuters