Thursday, May 14, 2015

Check your premises

Say economists Carl-Andreas Claussen and Øistein Røisland;
 Should MPCs vote directly on the policy rate – as most do – or should they vote instead on the underlying premises for the decision? We see two reasons why voting on the premises can be preferable.
  • The first is that voting on premises tends to lead to better average economic outcomes. ....

  • The second reason is that premise-based decisions make communication easier and better.
We'll offer a third, and more important reason; if your premises aren't true it would only be dumb luck that your conclusion would be valid. Which does seem to be implied in the two economists' piece.
In practice, there are probably elements of conclusion- and premise-based procedures, perhaps in a somewhat blurry mix, at all central banks.
Maybe that explains some perverse policies of recent years. Of major players among central banks;
The Federal Open Market Committee of the US Fed seems to use a strongly conclusion-based procedure. They discuss premises, but apart from the statements in the press releases they publish no majority view on premises. They decide on policy by voting on policy.
Got it; bad, and that ain't good. On the other hand;
...central banks that produce an inflation or monetary policy report are probably more premise-based in their decision-making, even if they vote on policy in the end. We can think of it as a partially premise-based procedure, as described above. Members first decide on the main elements of the report, and then take these as given when arriving at a preferred policy. The MPCs of the Bank of England and Sveriges Riksbank seem to use this approach.
Janet? Janet?

1 comment:

  1. In politics, it is much better to state the policy without reasons. When the policy turns out to be ineffective or perverse, one can find the correct reasons (excuses) later.

    If one gives reasons from the start, then one is sunk. Plus, the reasons all seem so complicated. Who can understand them? It is better to find out later which ones were correct.