ECB watch: Lucas out, (a little bit of) Minsky in
“Theory, which ignores the existence of financial instability, can lead to rules that the authorities should control the growth of the money supply to the well-nigh exclusion of other considerations. Once financial instability is recognized as being at times a significant threat, then such an unconditional posture becomes untenable. Money supply control is at best an conditional desirable policy posture.”
Official European Central Bank philosophy is largely based upon Robert Lucas style ‘rational expectations’ ideas: as long as the central bank is ‘credible’ in its strategy to keep inflation low and stable (i.e. willing to wreck the economy), inflation will be low and stable and the magic of perfect financial markets will ensure financial stability. Which boils down to the idea that an inflation rate “moins de 2%, proche de 2%” (after reading all these speeches from board members I can’t stand the english phrase anymore) is financial stability. Don’t underestimate this idea: it’s one of the main foundations of the design of the Euro. People really had the idea that this would work, even despite the fact that the inflation metric used is rather incomplete (not including house prices or prices of investment goods, for instance). The ECB tries to accomplish this goal by targeting a medium term growth rate of M-3 money of 4,5%.
But things are changing.
* according to this speech by board member Jorg Asmussen the bank does not target the amount of money anymore, but an (average) interest rate on government bonds instead
* and according to thisnew book on monetary statistics (published exactly five years after the start of the Great Financial Crisis…) the ECB really does not believe anymore that low and stable inflation (“moins de 2%, proche de 2%) is enough to guarantee financial stability. The quest for stability is even called a seperate ‘mandate’ which is as important as low and stable inflation (“moins de 2%, proche de 2%”). Great.
Minksy is not yet mentioned and the idea that past policies of the ECB might have stimulated financial turmoil (in the case of the ECB: for instance deliberately not looking at individual countries, house prices and the exponential increase in private debt, though all these data were known or even estimated by the ECB!) is still absent. But there is a clear movement away from Lucas-style economic fairy tales.
Interesting: the book also contains information on real micro foundations for macro statistics (i.e. macro statistics based upon micro data), which is of course an important linguistic break from neo-classical newspeak about these so-called ‘microfoundations’, wich are just assumed macro-indifference curves which just only assumed to behave like micro-economic neo-classical indifference curves but which are not based upon micro data at all.
Note also Mario Draghi’s insistence on global financial statistics…