Read the rest of the post here.Central banks run monetary policy not so much by doing things, but by threatening to do things. If their threats are credible, we never observe them carrying out those threats, and we often observe them doing the exact oppositeA credible central bank is a bit like Chuck Norris. (Apologies to Lars Christensen for stealing his metaphor.) Chuck Norris simply looks at the target variable, and it moves to wherever he wants it to go. It looks like magic. But it works because nobody wants Chuck Norris to carry out his implicit threat. So he doesn't need to.[...]The Fed needs to communicate its target clearly. And it needs to threaten to do unlimited amounts of QE for an unlimited amount of time until its target is hit. If that threat is communicated clearly, and believed, the actual amount of QE needed will be negative. The Fed's balance sheet is much bigger than in normal times. But in order to shrink its balance sheet back to normal, the Fed must threaten to expand its balance sheet by an unlimited amount. And be seen to be ready to carry out that threat.
Tuesday, October 18, 2011
Chuck Norris is Making a Comeback
At least in the blogosphere. Here is Nick Rowe: