Ya, I was careless, eh? Your point about instantaneity is right, Still working on the rigour thing, to integrate it all. All I meant to say is sometimes the BoC actually realizes it doesn't have a clue and tries to follow the market but that won't work either, will it? I was clumsy, but I don't think I got to this, (I certainly didn't want to):
"once the price is fixed so that market participants can start in fair positions, then the market can evolve into a natural equilibrium as long as government or some authority is there to make sure prices don't vary too much". Ever hear of currency bands or pegging currencies?
That's actually what the BoC says. I don't. They say they have a single policy, price stability, and a single instrument, the bank rate which, (they more or less say outright), they try to use in the manner you describe, above - "anchor the short end of the yield curve"... yada, yada.
Ever hear of currency bands or pegging currencies?
Damn rights I have. I live in Canada. For about forty of the last fifty years our currency has 'floated' and when we tried to peg it outright, it was disastrous. But it's still being 'pegged', sort of, isn't it? BoC sets interest rate and that affects Can$ exchange rate. Eighty per cent of our economy is connected to the US, so an argument is made we need to adapt ourselves to the market and the caprice of the US Fed by having a floating exchange rate, but then, we don't adapt ourselves by having the BoC set our rates - all it can hear is noise.. The only adaptation that works, long term, is no inflation here. That leads back to your argument: we can't have no inflation here unless interest rates adapt instantly to what is happening.
Furthermore, (paranoid that I am), I suspect screwing around with our interest rate is hammering our money vis a vis US money, and is one reason our standard of living has been going in the toilet - a US worker doing the same work as a Canadian gets paid basicly the same number of dollars but they are US dollars and those buy a hell of a lot more.
To the degree we devalue our dollar, we damage our competitiveness - how can we be efficient? Cheap dollar, sell cheaply, but since we are a trading nation everything that comes in is more costly. You can get around that by buying the older model, the cheaper one, fewer, etc. Which is OK for household appliances, sort of, but not good if you are buying industrial machinery: productivity increments smaller, investment slower, returns smaller, general price level rises slower, new business formation slower, etc than the monster market next door. Had we left rates alone in 1960, we'd likely still be eating your lunch the way we were then. Thiessen disagrees with this but then he would, wouldn't he? He was one of the guys setting the rates.
Specifically, the BoC can't calculate, determine, figure out, what the proper rate of interest should be and neither can any monetary authority.
That's what I got from Thiessen's essay! The only policy success was when they gave up targeting interest rates and did what the US Fed did. He says so. He just doesn't want to stick around and discuss the obvious conclusion leading from this. (By the way, I came across a very similar presentation on the Fed site). Like you say about AG, Thiessen knows better.
I'm obviously going to have to give up my unfortunate habit of understatement. I wrote, It's a history of BoC's policy difficulties - I should have written, history of policy disasters. By a participant.
These guys are hacks and amateurs.
James Coyne may have been an amateur by your standards and perhaps a control freak, but he certainly wasn't a hack or a hypocrite. He wasn't afraid of doing right or being 'unfair'. He rejected the demand he create inflation. He knew his enemy was inflation (and the ego maniac who was destroying the country), and he didn't bend. Hordes of Canadian economists were publicly after his scalp as well, and he didn't give in to them, either.
He didn't resign until they tabled a bill to remove him. Heavy dude.
Some Canadians (not enough) weren't fooled. His resignation in 1961 was the beginning of the end of that government. It effectively lost the next election forming a minority government and was destroyed in the subsequent one. The government that came after wasn't good, but it wasn't lead by someone who thought he was God, and so it had to be slightly less disastrous. |
