by Everyone insisted that the Bank of England (BoE) needed to say something following the financial turmoil that began on Friday and continued over the weekend. The BoE has now spoken. Sounds pretty dovish to me....Actually, the Bank concludes with, "accordingly. The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with in its remit." (emphasis added). This is not all that "dovish." The BoE is saying it will act aggressively through monetary policy, which markets generally want to hear. This is an example of single-variable-in a-linear-equation thinking, which is the basis of contemporary monetarism. This hypothesis (in a discredited theory) is that the interest rate set by the central bank as the
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Everyone insisted that the Bank of England (BoE) needed to say something following the financial turmoil that began on Friday and continued over the weekend. The BoE has now spoken. Sounds pretty dovish to me....
Actually, the Bank concludes with, "accordingly. The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with in its remit." (emphasis added). This is not all that "dovish." The BoE is saying it will act aggressively through monetary policy, which markets generally want to hear.
This is an example of single-variable-in a-linear-equation thinking, which is the basis of contemporary monetarism. This hypothesis (in a discredited theory) is that the interest rate set by the central bank as the independent variable determines the inflation rate as dependent variable in a linear function. While it is not a directly linear relationship owing to "friction," monetary policy is assumed to work with some unforeseeable lag as it works through the system (the same assumption as sanctions).
Single-variable thinking when dealing with complex adaptive systems like socio-economic systems is a logical fallacy underlying a "dogwhistle" or "meme" cognitive-affective bias. Central banks use it to influence expectations. It is a fallacy since, as Keynes observed, many more causal variable as involved as well as shifting circumstances, some of which are unforeseeable owing to emergence in a complex adaptive system. The number of variable and their relationships are unknown (epistemological uncertainty) and the emergence cannot be known from the initial conditions (ontological uncertainty).
The question is whether central bankers know this is a just dogwhistle that will influence the market even though there is little substance to it, or they actually think it works as assumed.
The LensThe Bank of England Had to Say Something
Stephanie Kelton | Professor of Public Policy and Economics at Stony Brook University, formerly Democrats' chief economist on the staff of the U.S. Senate Budget Committee, and an economic adviser to the 2016 presidential campaign of Senator Bernie Sanders