Wednesday, March 19, 2008

Europe's Helicopter Drop

Should the ECB take to the helicopters? The analogy refers to the mythic ability of central bankers to 'drop' money into the economy in order to prevent a recession. Ben Bernanke at the Federal Reserve has already earned the sobriquet Helicopter Ben for his willingness to shower distressed banks with multi-billion dollar bailouts.

With the Fed cutting its core interest rate by 0.75% yesterday the pressure will be on Jean-Claude Trichet at the ECB to follow suit in order to stop a further appreciation of the euro. The Sunday Business Post interviewed four bank economists at the weekend about the outlook for interest rates in the eurozone. Their answer: in short "we don't know"; while the longer version was "they might come down, they could even go up, but we don't know".

I sometimes think that economics will eventually be subsumed into social psychology, with the single exception of monetary policy. Monetary policy is part art and part science - hence the difficulty all economists have with the subject (never mind forecasts). This was brought home to me listening to a fascinating discussion on the nature of money and monetary policy in the context of the present crisis over at EconTalk. A great primer for those of you wishing to add a little theory to the headlines.

Coming back to Europe, check out this presentation by my old macro-economics lecturer Willem Buiter at the LSE. His bottom line: Europe isn't in anything like the same mess as the United States and we have a lot more room for manoeuvre for now. So maybe the ECB should start their engines but not take off just yet.

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