If anything has survived the global financial crisis, it is inflation targeting. This is odd. After all, pre-crisis, many economists and policy makers in developed markets enthusiastically embraced the “Great Moderation” – the idea that wise monetary policies had not only helped bring inflation to heel but also, as a result, delivered more stable economic activity. “No more boom and bust” was not the boast of politicians alone: it became a core belief?of the economics establishment.
Yet the boast was clearly wrong. A narrow focus on preventing rapid price rises ultimately proved highly damaging. Policy makers ignored other signs of incipient instability; most obviously, rapid credit growth and, in the US at least, surging housing activity. Having done so, they gave the go-ahead to excessive risk-taking: with inflation under control, there was no reason for investors to fear monetary shocks.
History shows, however, that economic and financial crises are more often associated with periods of low, not high, inflation. The former may be desirable in many respects but it seems the obsession with precision-engineered targets simply reflected the fears of a generation of policy makers scarred by monetary mistakes of the inflationary 1970s.
Post-crisis, central bankers are far more focused on financial stability. But they have mostly been unwilling to admit the role of monetary policy in encouraging excessive risk-taking. Given the widespread reduction of long-term borrowing costs induced by quantitative easing and the associated resurrection of the “hunt for yield”, this is worrying.
Policy makers hope to tame excessive financial bets through macroprudential policies. Yet their success is hardly guaranteed. Spain’s “dynamic provisioning”, by which banks were required to hold more capital against possible future losses than they necessarily wanted to, did not prevent economic meltdown. The Bank of England is contemplating macroprudential policies to tame the more bubbly aspects of UK behaviour, most obviously an overheating London property market, knowing that the experience of other countries has been decidedly mixed.
Today, embracing macroprudential policies offers unfortunate parallels with the 1970s zeal for “incomes policies”. These microeconomic controls were designed to curb inflation by containing pay rises, even as macroeconomic policy was calibrated to boost growth and employment. It did not work. Macroprudential policies are designed to limit risks in the financial system even though macroeconomic policy – monetary stimulus designed to lift economic activity – may have the reverse effect. As in the 1970s, this “push me, pull you” approach is unlikely to be sustainable.
Fortunately, there is a way forward. The blinkered focus on meeting a precision-engineered inflation target must be abandoned. Instead, monetary policy must address a number of potentially competing objectives, using what might be best described as “positive ambiguity”. Central banks should commit to a steady rise in prices in the medium to long-term; but, depending on other macroeconomic variables, they should also tolerate sustained departures from target.
To take one example, Japan’s late 1980s monetary policy looked about right judged by inflation alone. But once rapid money supply growth and surging asset prices were taken into account, it looked very wrong. Had interest rates been higher, inflation in the near term would have been exceptionally low but the asset price bubble that burst in 1990, sparking a deflationary spiral, might have ended up a lot smaller. Ironically, a bigger near-term inflationary undershoot might have reduced the risk of persistent deflation in the long run.
“Positive ambiguity” would emphasise that interest rates might rise – or fall – for a host of reasons not necessarily connected with the near-term inflationary outlook: credit growth, balance of payments, asset price inflation and so on. Central banks would be forced into making judgments, removing the faux certainty generated by a mechanistic approach to inflation targeting.
The cost would be an increase in monetary policy uncertainty. That, however, would also be the benefit: making the world a little less certain might reduce the excessive risk-taking encouraged by central banks’ narrow focus on inflation both before and after the financial crisis.
The writer is HSBC global chief economist and author of ‘When the Money Runs Out’
注：作者为汇丰银行(HSBC)全球首席经济学家，著有《When the Money Runs Out》一书。