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2012 has been a historic year in monetary policy.Here are the big events:
- The ECB came into its own. The monetary structure of the Eurozone has been flawed from the get-go, but the sovereign debt crisis that started in 2009, really drove home the fact that the nations in the currency bloc were weak due to the fact that unlike other countries, they did not have “their own” currency or central bank to back them up. Everyone recognised that the only way the crisis could end would be for the entity with unlimited money — the ECB, because it has a printing press — to get in there as a lender of last resort. That’s what the ECB is now doing, with its promise to buy bonds of countries that request it, on condition of reform.
- The FED changes the goalposts. At the beginning of 2012, there was no active QE program, and the only promise was to keep rates low through 2014. Then over the summer, the Fed changed the game, with its announcement of QE-open ended, a promise to keep buying bonds until the economy improved. There would be no cap. Then at its last meeting, it adopted “Evans Rule” a promise to keep money easy until unemployment hit 6.5% or inflation projections hit 2.5%, meaning that for the first time, the Fed was really offering guidance and expectations management, an approach long favoured by academics.
- Michael Woodford endorse Nominal GDP Targeting. This August at the Jackson Hole conference, Michael Woodford, one of the world’s most pre-eminent monetary policy economists basically came out in favour of an approach where the Fed targeted a specific level of economic output. This was a huge endorsement of a buzzy idea, and it’s likely one reason that the Federal Reserve has moved so fast to attach specific goals to its easing.
- The Bank of England’s big poach. In what is (hopefully) a sign of things to come for the monetary policy world, the BOE poached Mark Carney from the Bank of Canada. Carney is considered the world’s best central banker, and now he has a huge stage, and a huge challenge (a weak economy, a gangly banking system, a government with tons of debt, etc.). It will be good for the world economy if tests can rise up from smaller central banks, and be applied globally.
- Abe wins! Just capping it off now, Shinzo Abe has won the election on Japan, and he’s run on a platform of forcing the Bank of Japan to do more easing. His first priority he says: Defeat deflation!