Muddled Media Macro Musings
Bemoaning scientific journalism is a popular pastime of scientists. Fortunately, central banking is a particularly easy field to cover, made difficult by the fact that practitioners in the field obfuscate their actions to increase their status. Central bankers have, more or less, one policy tool, open market operations, with which they can target one (count ’em!) nominal variable. That is, central bankers can pick a single price and put that price wherever they want. If the Fed wanted the average price of red delicious apples to be $1, they could put it there, but the relative prices of everything else would float around. A gold standard is when the central bank pins down the price of gold and lets everything else float. An exchange rate targeting regime is when a central bank pins down the price of the exchange rate, etc. Since the 1980s or so, most central banks have targeted the average price of everything, which is called inflation targeting. NGDP targeting stabilizes the total nominal value of sales in the economy, so the price of everything sold in the course of one year.
Bad things happen in economies and relative prices change, over which the central bank has no control. Is the relative price of houses too high? (“Relative to what?” you might ask, but that’s another story) Well, the central bank can’t affect that. It can lower the nominal price of housing, but then it has to lower the nominal price of everything else too. Whenever talking about a central bank, there are only two questions: “What are they targeting?”, and “Did they hit their target?”.
Scott Sumner tears apart Simon Nixon’s recent article (gated) in a recent blog post. But there is nothing special about Nixon in particular. Journalists in general who don’t get that (a) central banks only target one variable and (b) they don’t control relative prices write things which highlight their ignorance. Even in the WSJ, even in the Financial Times, and even in the NYT. People need to hold institutions accountable for their failures, and part of that is to understand what those institutions control and what they do not. Particularly incompetant central banks, such as the Bank of Japan, don’t seem to even know what their own target is, and so drift aimlessly creating chaos in their economies. Likewise, central banks with explicit targets sometimes miss those targets, such as the ECB. Central banking in practice can be quite complicated, but the basic principles couldn’t be simpler: pick a price and put it where you want it.