Optimal Control

Is the Federal Reserve too volatile and hair-trigger? Or is the ECB too sluggish?

Comments

[Ian Dew-Becker]

for the past few business cycles, EU output has tended to lag the US -- we turn negative first and recover first. So some of what you're seeing there is just that lag (see figure 1 here: http://www.people.fas.harvard.edu/~idew/papers/EU-US-LP.pdf)

[Matt]

The larger economy should be the more sluggish.

Large, economically, means larger in terms of long term yield, but second order affects will be smaller in terms of shorter term volatility. The large economy will be more "minimum phase" when one includes spectral effects.

[Nicholas Beaudrot]

Hasn't the ecb explicitly said that they want to keep interest rates on the high side to encourage eu economies to adopt "pro-market" reforms? Isn't this one of Sarkozy's beefs with the ecb, that it will not let the French be French?

[Matthew G. Saroff]

It ain't the Fed that is too hair trigger, it is Alan Greenspan, and the numbers following are to clean up his mess.

[Dr. Steven J. Balassi]

The ECB has the better model. Both economies are too big to micromanage, as the Fed tries to do. The ECB also takes some speculation out of each rate hike. This happens because they don’t do a quarter point adjustment every six weeks. The ECB model also promotes stability in the banking and lending sectors.

[a]

The ECB are the adults in the room. The Fed act like a bunch of children, raising or cutting rates on the impression of a moment.

[kharris]

I think we should avoid getting carried away by the premise of the question.

Why is it necessarily so that there is one right approach, so that one central bank is right, the other wrong? It seems entirely likely that the two may need different approaches to policy. It seems entirely likely that both may have sub-optimal approaches to policy. It seems unlikely, knowing what we do about central banking, that both have optimal policy for their circumstances, but it is at least a theoretical possibility.