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Do monetary policy committees present an insuperable barrier to Odyssian forward guidance?

Summary:
One kind of forward guidance – consciously eschewed by central banks during the crisis – was dubbed ‘Odyssian’. The idea was that, deprived of being able to move the short interest rate by the zero bound, central banks would attempt to lower the long rate by promising to keep the short rate in the future lower than would normally be thought consistent with the inflation target. The name derives from the Greek tale of the warrior instructing that his hands be tied to the mast of his ship as it sails within earshot of the song of the sirens, so that he could later resist their otherwise fatal attraction. The corollary was a commitment to overshooting the target later.  The benefit of doing this was that provided a stimulus by lowering the real rate [nominal rate minus expected

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One kind of forward guidance – consciously eschewed by central banks during the crisis – was dubbed ‘Odyssian’.

The idea was that, deprived of being able to move the short interest rate by the zero bound, central banks would attempt to lower the long rate by promising to keep the short rate in the future lower than would normally be thought consistent with the inflation target.

The name derives from the Greek tale of the warrior instructing that his hands be tied to the mast of his ship as it sails within earshot of the song of the sirens, so that he could later resist their otherwise fatal attraction.

The corollary was a commitment to overshooting the target later.  The benefit of doing this was that provided a stimulus by lowering the real rate [nominal rate minus expected inflation], boosting demand, raising inflation now.  An overshoot later would be more than compensated for by a smaller undershoot now.

An objection commonly made is that the committee structure of MPC decisions precludes such a commitment, because current committee members have no means of binding their successors.

Two points.

The first was suggested by Richard Barwell at today’s MMF conference on monetary and financial policy.  He suggested – I may have garbled this – that the Chancellor could simply stipulate that once an Odyssian commitment was made, subsequent MPC recruits could not change the terms of that commitment.  The commitment would not be unconditional anyway, and would be data contingent to some extent, but their job would be to feed in the data into that commitment strategy, and not to re-evaluate.

Second, note that although committee members do turn over, expected turnover over a 5 year period, say, would be much less than 100%, with external MPC members serving typically renewable 3 year terms, and internals serving usually renewed 5 year terms.  A sufficiently large majority now might not be able to regulate the distribution of future rates so that it entirely conformed to one consistent with a follow through on the commitment, but it could tame that distribution of future rates quite a bit in that direction.  It would be wrong, therefore, to assert that Committees in themselves make Odyssian forward guidance impossible.  They would merely dilute it.

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