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As you would expect I agree with your article on almost every point. I'm happy that you're emphasising the regime uncertainty problems and the "tightrope" that central banks face, I think some of the other monetary equilibrium economists have been glossing over that.

There is one small exception though which is worth noting. The US isn't the same as Britain. Britain has an inflation target the US have some wishy-washy laws that call for the Fed to pay attention to both price stability and unemployment. This makes the Fed's position trickier than the BoE's. Certainly the BoE has to take some notice of unemployment and output, but it can take much less notice than the Fed.

That makes things a bit more predictable in Britain than they are in the US. It also makes the pronouncements of the central bankers a bit less significant. Their significance in the US is that they indicate whether the Fed is going to pursue the unemployment mandate or the price stability mandate more strongly. For example, if the economy is heading back into recession (as the US seems to be) then is the central banker says something about being aware of the threat of inflation then that's a signal to the market that he will follow the price mandate more thoroughly and allow employment to fall rather than performing heroic quantitative easing. If he says something about the threat of deflation or unemployment then this is the situation where monetary policy becomes much less powerful than normal, because it's known by the market that though the Fed can temporarily inflate they must pull back later.

In Britain the problem still exists because we have an inflation target not a longer-run price level target or NGDP target. I think that in Britain the uncertainty problem is a bit less significantly than it is in the US.


I think that central banks can generate uncertainty. If they are unclear about future monetary policy then marginal future plans that depend for their profitability on the price level cannot be made. It's not that QE per se creates regime uncertainty. It's that it foster a situation where the future price level becomes less clear because of doubts over the central banks intentions and the political and technical problems of withdrawing the base afterwards. It places the central bank on that tightrope you discussed.

MBT Shoes

It's so nice to have you do all of the research for us. It makes our decision making so much easier!! Thanks.

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