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November 06, 2014

Why Everyone & His Uncle Likes Doing Dr.Raghuram Rajan's Job

Every time a monetary policy review is round the corner (like now), everybody from the Finance Minister to twitter-friendly industrialists decide to front run Dr.Rajan to get media attention. In a new column titled "Celebrity central bankers" Prof. Kenneth Rogoff, who like Dr. Rajan is a former chief economist of the IMF, says "much discussion of central-bank pronouncements and decisions grossly exaggerates their economic significance" and highlights some vested interests that benefit from the hoopla. Extracts (emphasis mine):
For starters, the public perception that central bankers are omniscient makes them an attractive whipping boy for politicians. Moreover, the digital revolution in media has elevated the role of business news, one of the few profit centres for print and broadcast journalism in many countries. Central bankers' pronouncements are of interest to businesspeople - especially in the financial sector - and businesspeople are of interest to advertisers.
Finally, and perhaps least appreciated, is the fact that central-bank policy pronouncements are almost unique in having clear and predictable effects on financial markets, at least in the very short run (which can be a day or less)..And with trillions of dollars swirling around global financial markets, this predictability creates a fat target, with investors willing to make massive bets when they are pretty sure they are right, even if the profit for each dollar is small.
...It is not as if they change interest rates all of the time. Nor have they developed new, more robust models for analysing the economy. On the contrary, major central banks' growth and inflation forecasts in the years since the financial crisis have consistently overestimated both growth and inflation - and by wide margins.
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