Is policy divergence re-emerging?
Jordà and Taylor study the divergence in monetary policy and business cycles in four major economic areas (the Euro area, Japan, UK and US) since 1960. Their analysis is based on the premise that policy interest rates are not an accurate measure of a country’s monetary policy stance. Instead, analysis should focus on the difference between the country’s prevailing policy interest rate and the country’s short-term “natural” interest rate, defined as the Wicksellian natural real rate. They find:
- In the short-run, only the stance is under the control of the monetary authority;
- Local developments in output gaps and inflation play a smaller role, and;
- As inflation, output gaps, and the monetary policy stances of the four economies have become more synchronized since 1980, central banks are increasingly “riders on the storm” of global developments.
Is non-coordinated policy divergence of concern? The Jordà and Taylor argument that long-run forces matter, that these forces are beyond policymakers’ control, and also contain a strong global component, should alleviate such concern.
Riders on the Storm
Authors: Òscar Jordà, Alan M. Taylor
From: University of California, Davis
