These days it is fairly widely accepted that it’s very hard for central banks to get traction at the zero lower bound unless they can convince investors that there has been a regime change – in other words, changing expectations about future policy is more important than what you do now. That’s what I was getting at way back in 1998, when I argued that the Bank of Japan needed to “credibly promise to be irresponsible,” something it has only managed to do recently.
The trouble is that regime change is hard to engineer. President Franklin D. Roosevelt did it by taking America off the gold standard, but going off gold isn’t something you get to do very often.
Last week, however, the Swiss National Bank managed a credible regime change. Unfortunately, it was a change in the wrong direction. By throwing in the towel on the peg to the euro, the bank immediately convinced markets that its previous apparent commitment to do whatever it took to avoid deflation was null and void. And this expectations effect trumped the concrete, immediate policy of drastically negative interest rates on reserves.
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There are two things to bear in mind. First, having thrown away its credibility – in today’s world, the crucial credibility that central banks need involves not a willingness to take away the punch bowl, but a willingness to keep pushing liquor on an abstemious crowd – it’s hard to see how the S.N.B. can get it back. Second, there will be spillovers: The bank’s wimp-out will make monetary policy more complicated in other countries because it will leave markets skeptical about whether other supposed commitments to keep up unconventional policy will similarly prove to be time-limited.
I gather that some readers didn’t understand what I was driving at when I declared in a recent blog post that the economist Joe Stiglitz and yours truly are the left’s “econoheroes,” while the likes of Stephen Moore and Art Laffer play that role on the right.
First of all, I was not declaring myself an actual hero; I’m nothing of the kind. Did I mention that I’m sort of short? Actually, hero worship of any kind, for anyone, is a big mistake – place too much faith in any individual, and you’re very likely to be let down, hard. (There are, however, real villains.)
No, what I meant – and I thought that this was obvious – is that Mr. Stiglitz and I do tend to get quoted or invoked on a frequent basis in liberal media and by liberals in general, usually with (excessive) approbation. And the thing is that while there are people playing a comparable role in right-wing discussions, they tend not to be highly cited or even competent economists.
So don’t tell me that Greg Mankiw or Robert Barro are famous economists and also conservative. Indeed they are. But are they omnipresent on the conservative scene? Take a crude metric, and look at hits on Google News. If you search for “Mankiw economy” you get about 5,200 hits, many of them involving debates at recent economics meetings. If you type in “Stephen Moore economy” you get 65,700 hits. If you put in “Stiglitz economy” you get 43,800.
I see this as a real asymmetry. You can, if you like, claim that within the economics profession conservatives are the intellectual equals or superiors of liberals (and no, economics professors aren’t overwhelmingly liberal in the way that some professors are from other social sciences). The point, however, is that the right does not turn to these eminent conservative economists for guidance and support. It prefers the hacks.