Monetary Policy: The more ambitious your goals the less hard you have to work
By Scott Sumner
In most areas of life, lofty goals require hard work. Monetary policy is the exact opposite. The more modest the objective the harder a central bank must struggle to achieve those objectives.
For instance, the Reserve Bank of Australia has had pretty ambitious goals, including 2% to 3% inflation. Because Australia also has a high rate of immigration and fast RGDP growth, this translates into roughly 6% NGDP growth in recent decades, well above other developed countries. In that sort of economy, nominal returns on investment are well above zero, and people (and banks) don’t want to hold much zero interest base money. Australia’s base is about 4% of GDP, lower than the US base demand even during normal times.
At the other extreme are countries like Japan and Switzerland, which have had near zero inflation in recent years. Japan also suffers from a falling population, while Switzerland “suffers” from the facts that its currency is so respected that it has become a safe haven in times of turmoil. Thus both countries have low interest rates and a very high demand for base money as a share of GDP. As a result their central banks have the arduous task of having to “spend” lots of yen and Swiss francs (SF) buying assets to prevent a steep deflation like the early 1930s. Neither bank would face that “problem” if they targeted NGDP growth at 5%, level targeting. (Notice that central banks are the world’s only counterfeiters who complain about the task of having to print up money at near zero cost and buying valuable assets with that free money.)
It’s possible that the Swiss National Bank thinks the less lofty the goal, the less hard it will have to work. That might be one reason why they decided to stop pegging the SF against the euro. But they will find out that the reverse is true. People want to hold hard currencies. The harder the currency the greater the demand. The SNB just made the Swiss franc considerably harder than it was a few days ago. Look for lots of QE from the SNB in the future. They’ll be working fanatically trying to hold down the value of their currency while the RBA officials have plenty of time to go surfing on Bondi Beach.