On Thursday, I had coffee with one of the few market economists I always try to read (despite the dozens of reports I get each week). Surprisingly!!!, the conversation turned to monetary policy after a while.
Now, I should tell you that my buddy does not share my cautionary view on monetary policy. He was arguing for (predicting) rate cuts before anyone else in the profession, and he turned out to be right. But one thing we managed to agree is the asymmetry in the Bank's policy response. My friend was arguing that the Bank should have cut larger amounts in a couple of months rather than slow and sort of preannounced cuts- what he had in mind was the Bank's rapid response to the mini crisis of June 2006. Another asymmetry I had noted a couple of months ago was the Bank's asymmetric response to low and high inflation. Now, there is no golden rule of policymaking that says that policy response should be symmetric; in fact, there are many reasons that justify why it shouldn't be. But those reasons should be spelled out clearly, which to my knowledge (and my friend's) hasn't been. Turning to my friend's point, although I always would like to err on the side of caution, if I had to choose, I would definitely pick two cuts of 100bp over four of 50bp each. The former would have probably worked at least marginally better in transmitting to the financial sector and the real economy.
A corollary of my friend's line of thought is that the Central Bank should not be all clear and transparent on its policy actions all the time. Good communication doesn't hurt, but he believes that the Central Bank should surprise from time to time. Now, this is again an area where there is considerable debate. I should say that transparency and predictability has been the norm in the inflation targeting literature, as the importance of managing expectations has been understood. But you could easily make a point for the opposite case. This is something I could devote to in my next Hurriyet column, perhaps.
Incidentally, the one-pager to the latest cut has sort of divided market economists. While some have seen the tone as an end to easing, others are sure that more cuts are to follow, even more than one final cut of 25bp embedded in expectations at the moment. I guess this kind soft ambivalence is what my friend was asking for (we talked a couple of hours before the MPC meeting, and I haven't checked up with him yet).
As a side point, Turkey is probably the only country where the hawk is the one with the easing bias: In quite a few newspapers, VP Erdem Basci was being labelled as the dove and President Durmus Yilmaz as the hawk...
Now, I should tell you that my buddy does not share my cautionary view on monetary policy. He was arguing for (predicting) rate cuts before anyone else in the profession, and he turned out to be right. But one thing we managed to agree is the asymmetry in the Bank's policy response. My friend was arguing that the Bank should have cut larger amounts in a couple of months rather than slow and sort of preannounced cuts- what he had in mind was the Bank's rapid response to the mini crisis of June 2006. Another asymmetry I had noted a couple of months ago was the Bank's asymmetric response to low and high inflation. Now, there is no golden rule of policymaking that says that policy response should be symmetric; in fact, there are many reasons that justify why it shouldn't be. But those reasons should be spelled out clearly, which to my knowledge (and my friend's) hasn't been. Turning to my friend's point, although I always would like to err on the side of caution, if I had to choose, I would definitely pick two cuts of 100bp over four of 50bp each. The former would have probably worked at least marginally better in transmitting to the financial sector and the real economy.
A corollary of my friend's line of thought is that the Central Bank should not be all clear and transparent on its policy actions all the time. Good communication doesn't hurt, but he believes that the Central Bank should surprise from time to time. Now, this is again an area where there is considerable debate. I should say that transparency and predictability has been the norm in the inflation targeting literature, as the importance of managing expectations has been understood. But you could easily make a point for the opposite case. This is something I could devote to in my next Hurriyet column, perhaps.
Incidentally, the one-pager to the latest cut has sort of divided market economists. While some have seen the tone as an end to easing, others are sure that more cuts are to follow, even more than one final cut of 25bp embedded in expectations at the moment. I guess this kind soft ambivalence is what my friend was asking for (we talked a couple of hours before the MPC meeting, and I haven't checked up with him yet).
As a side point, Turkey is probably the only country where the hawk is the one with the easing bias: In quite a few newspapers, VP Erdem Basci was being labelled as the dove and President Durmus Yilmaz as the hawk...
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