Wednesday, October 7, 2015

Is monetary policy a science?

No, it's not. So says William White, in an interview earlier this year.

White is the formerly the head economist at the Bank for International Settlements, in Basel.

Read the whole thing, but here is a short excerpt:
What would help to improve monetary policy? 
I’ve become more and more convinced that the fundamental problem with the central banks – and for that matter with the broader economic community – is this insistence that the economy is a kind of machine that you can describe with many equations.
The reality is, that the economy is a complex adaptive system. Like a forest. The distinction between the monetarists and the Keynesians is nothing compared to this. The difference between all of these models and the kind of insights that you get from working with economies as complex adaptive systems are totally different. That is not yet accepted. 
How does a complex adaptive system function?
If you accept this complexity, then you have to accept a number of things that most central banks have not yet fully incorporated into their thinking. One of them is: these systems break down all the time. If the economy is the most complex adaptive system that mankind has ever created, it will break down on a regular basis. 
Historically it has broken down on a regular basis. And, like the boy scouts, we should be prepared for it. Fact of the matter is, when we went into this crisis, we were not prepared for it. And it’s not much better now. There was no bank insolvency regime, no deposit insurance, no memorandum of understanding – all these things that should have been in place, but they just weren’t.