Tuesday, 21 March 2023

INFLATION: "We are] still at risk of really bad macro forecasting errors, and central banks unable to live up to their rhetoric."

"[F]inance minister Grant] Robertson has been both an active and passive party in the serious decline in the quality of our central bank over recent years, and ... only the Minister of Finance – current or future – can make a start on fixing the institution. Institutional decline – and it isn’t just the Reserve Bank – has been a growing problem in New Zealand, and the current government’s indifference has only seen the situation worsen...
    "But, for better or worse, when most people think of a 'monetary mess' at present they probably primarily have in mind inflation.... [and] there simply isn’t any compelling evidence ... that any or all of the many things one can criticise Robertson for really go anywhere towards explaining how badly things have gone with inflation ...
    "[T]o me the evidence very strongly suggests that what happened over the last two to three years was that (a) central banks badly misunderstood what was going on around the macroeconomics of Covid, (b) so did almost all other forecasters, here and abroad, and (c) there isn’t much sign that central banks with better qualified more focused people or more open and contested policy processes did even slightly discernibly better than the others. I wish it wasn’t so.... 

The Survey of Professional Forecasters , published by the Philadelphia Fed, shows a clear 'hedgehog' – one that systematically overestimates the Fed’s willingness to hike interest rates, up until the time of the first hike in 2015, at which point SPFs estimations have underestimated the speed of hikes.

    "[I]t is remarkable how the [central banks'] forecasting errors are so uniformly wrong in one direction at a time. But they make for pretty hedgehogs.... If hedgehogging is unintentional, as Jonathan Newman observed on Mises.org a few years ago, 'their models are junk.' If the tendency is intentional, they are just trying to project unwarranted optimism – which is indeed the suggested explanation among those who’ve studied the Fed’s forecasting failures.
    "[W]e – and other countries – [are] still ... at risk of really bad macro forecasting errors, and central banks unable to live up to their rhetoric."
~ composite quote from Michael Reddell, from his post 'New Zealand’s monetary policy mess,' and Jokaim Book, from his post 'Central Banks' Forecasts Are Basically Garbage'

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