A speech from BOJ Deputy Governor Kikuo Iwata last night:
More recently in the United States, nominal rates went up, inflation expectations came down, and the expected real rates picked up after market participants started forming a view that the Fed would start tapering the pace of its asset purchases in light of Chairman Bernanke’s testimony on May 22, while in reality this was meant to slow the pace of increase in excess reserves. By contrast, the FOMC’s decision to continue with its quantitative easing on September 18 led to a decline in nominal rates, a rise in inflation expectations, and a decline in the expected real rates (Chart 23).
How beautifully ironic that the BOJ board is able to produce a critique of Bernanke’s tight money. Iwata continues:
What should we make of these episodes? In my view, they owe much to the fact that market participants make judgments on the monetary policy regime after they see changes in the monetary base and the excess reserves, and then form projections for the money stock, the future course of interest rates, and projections for prices.
What matters to interest rates and inflation expectations is the monetary policy regime of a central bank and market participants’ views on the prospects for the money stock based on such a regime. The current level of money stock is irrelevant. It is in this sense that the simple “quantity theory of money,” in which there is a one-to-one relationship between the current money stock and prices, does not hold in practice. Nonetheless, there is a close relationship between the projected future course of the money stock and inflation expectations, and the present rate of inflation is determined based on inflation expectations formed in that way.
Three graphs to try to convince you why slow wage growth is a “good thing” for the UK, given the path of aggregate demand.
Graph one: the change in nominal gross value added since 2008. This is nominal GDP at basic prices not market prices, so factors out changes in indirect taxes such as VAT.
This is very similar for France and the UK.
Graph two: the change in nominal hourly wages since 2008.
The fact that nominal wages increased in both countries between 2008 and 2009 despite sharp falls in nominal demand is a good illustration that nominal wages are indeed sticky. But there is “sticky” and there is “gravity-defying”. French wages are up nearly 12% since 2008 despite a 7% rise in national income over this period.
What’s the result? The “hard-working families” of the UK are actually working hard (relatively speaking; not to deny there is slack in the labour market). In France, not so much.
… that is the opposition front bench. Soon, we might be able to “celebrate” that even Japan has a higher inflation rate than most of the EU, thanks to Shinzo Abe and the ECB.
I enjoy reading the Hansard achives from the 1930s… what an amazing resource. It is not hard to find parallels to modern-day debates about macro policy. The following quote is from David Mason MP speaking in Parliament in July 1934 during a debate which appears to be mostly about monetary policy:
It is rather interesting to see how complete is the analogy in many respects between that period of history after the Napoleonic Wars and the period through which we are now passing. Of course, there is the difference of time, and increases of population and so forth, but there were inflationists and deflationists, paper money men and bullion men just as there are now, and it is curious and interesting to find, if one will take the trouble to read up the Debates in this House, comments and statements made almost similar to those that are being made to-day.
I believe that, if His Majesty’s Government would announce in due course that they were prepared to set up an inquiry into the monetary system and into monetary policy, they would be astonished at the flame of enthusiasm that they would arouse throughout the country, especially among the younger people. They are not satisfied with world conditions as they are to-day; they are not satisfied with any policy of going back to 1924 or 1914; they feel that the productive capacity of the world is immense, but that it is not being utilised owing to the defects in the monetary system, which should facilitate the exchange of goods and services all over the world.
I love that clarity. So many today talk about monetary policy only in terms of borrowing and lending or banks or interest rates… how about sticking with “facilitating the exchange of goods and services”? A little later from Loftus, here is that history we’re repeating:
We know the effect which, as my hon. Friend the Member for East Aberdeen has pointed out, deflation has had upon our people; and we know also that to-day the economic problem is linked with the political problem. In Yugoslavia you have revolutionary discontent. Why? There is deflation. In Italy under the surface there is revolutionary discontent, Why? Deflation. In France, riots and revolutionary discontent. Why? Deflation. What was that bloody business in Germany the other day caused by but the pressure of deflation constantly driving down the standard of living? That was the main cause.
The loci of the riots and deflation only a little different this time around.
There’s always “good news” from the European periphery where the cost of living is falling, falling, falling – every British politician’s dream (and they don’t even need price controls).
Looking at Eurozone macro data still feels a little like “rubbernecking”… but I’ve mastered Eurostat now, so here goes. Charts here show the headline HICP, the HICP at constant taxes (HICP-CT) and the HICP ex administered prices.
All three of the above have large “VAT wedges” since 2009.
In fact even the aggregate Eurozone HICP has a noticeable “VAT wedge” of its own, which I had not realised.