‘Leaning against the wind’ with rates may have merit -- ECB
The European Central Bank said a policy of raising interest rates to deflate asset-price bubbles shouldn’t be dismissed on principle.
Recent empirical and theoretical research has shifted the balance in favour of such an approach, known as leaning against the wind, “even if the economic science is still divided on these issues,” the ECB said in a book published in Frankfurt today.
In a footnote to the book, which is titled “Enhancing Monetary Analysis,” the bank said several members of its Executive Board have in the past shown “some sympathy for the principle of leaning against the wind.”
Policy makers and economists are debating whether central banks should use rates to prevent the formation of asset-price bubbles after the collapse of the US housing market triggered the worst global recession since World War II.
Arguments against the policy include the difficulty of identifying a bubble before it’s too late and in assessing whether it’s fueled by fundamentals or speculation.
While there’s “broad consensus among economists that monetary policy would hardly be the first best line of defense” against asset-price cycles, “this does not diminish the importance of the issue for monetary policy makers,” the ECB said.
The financial crisis has also shown that the analysis of monetary aggregates is a “crucial part of a robust framework” for monetary policy deliberations, the ECB said.
“Many of the big policy mistakes of the past were due to a disregard for, or misinterpretation of, monetary developments,” it said.
“There can be little doubt that the changing structure of the financial system has rendered the real-time analysis of monetary developments more difficult,” the bank said.
Still, “the simple fact that analysis has become more complex does not mean that it should be discontinued.”
Current monetary analysis confirms that “inflationary pressures remain contained” in the euro region, the ECB said.
There are “neither inflationary nor deflationary risks” and credit growth is behaving “in line with historical relationships.”