Tuesday, April 29, 2008

The Problem With Monetary Central Planning

Danish economics blogger Claus Vistesen, who despite being a non-Austrian and so for that reason often being wrong on some issues is a quite talented analyst (and for that reason has been added to my blogroll), calls me "The econsphere's in house Austrian economics analyst". Considering that there are many Austrian economics bloggers on the web aside from me, that should be interpreted as a compliment.

That reference to me was made in the context of a discussion of ECB monetary policy where he noted my observation that current ECB interest rates aren't high enough to meet the ECB's consumer price inflation target, much less its money supply target. Something he comments with:

"Of course, at this point we also really ought to put the hawks' argument to the test. How far and long should the ECB raise rates in order to bring down inflation to the target (2%) not to speak of bringing the M3 growth within range of its 3-4% growth target?"

Now we are finally getting closer to the point of it all. The answer to that question is that we don't know how high they should be to reach these goals, or at least not the consumer price inflation goal because the effect there is lagged (by contrast money supply is easier to change because the effect is more immediate) . And as we can't really know for certain how high inflation will be otherwise a year or so (the fact that the time lag is not fixed in time further complicates the issue) later, this means that central bank policy can just as well push inflation further away from its goal than closer to it. As central banking is a form of central planning, it faces similar problems as other forms of central planning, including the knowledge problem.


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