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The professor vs. the markets

Summary:
Turkey’s authoritarian leader sacked the central bank head just months after appointing him to the position: When Turkey raised interest rates more than market expectations last week, Naci Agbal was cheered by investors who viewed the move as more evidence that the central bank governor was willing and able to pursue a conventional monetary policy. Two days later, he was out of a job — the third governor President Recep Tayyip Erdogan has sacked in less than two years — and the currency was set to tumble as much as 14 per cent. The shock decision announced in the early hours of Saturday has rattled investors who hoped the appointment of Agbal, a market-friendly economist, four months ago meant Erdogan was ready to cede a degree of autonomy to the bank. The fact

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Turkey’s authoritarian leader sacked the central bank head just months after appointing him to the position:

When Turkey raised interest rates more than market expectations last week, Naci Agbal was cheered by investors who viewed the move as more evidence that the central bank governor was willing and able to pursue a conventional monetary policy.

Two days later, he was out of a job — the third governor President Recep Tayyip Erdogan has sacked in less than two years — and the currency was set to tumble as much as 14 per cent.

The shock decision announced in the early hours of Saturday has rattled investors who hoped the appointment of Agbal, a market-friendly economist, four months ago meant Erdogan was ready to cede a degree of autonomy to the bank.

The fact that Turkey’s currency depreciated does not necessarily mean it was a bad decision.  It would be good news if the yen depreciated 14% on news of new leadership at the Bank of Japan, an indication that the new central bank chief was likely to make progress toward Japan’s 2% inflation target.  But Turkey has 15% inflation, and doesn’t need monetary stimulus.

Sahap Kavcioglu, who has replaced Agbal, said in a statement on Sunday that monetary policy instruments would “continue to be used in an effective way towards the fundamental goal of a permanent decline in inflation”. He said the Monetary Policy Committee would meet as scheduled on April 15, suggesting there would no extraordinary MPC meetings.

But Kavcioglu, a little-known professor of banking, shares the president’s unconventional view that high interest rates cause inflation.

High interest rate don’t cause inflation, just as low interest rates do not cause inflation.

It’s one thing to advocate NeoFisherian ideas as a college professor.  But markets are quite efficient, too smart to engage in the fallacy of “reasoning from a price change”.  Mr. Kavcioglu is about to discover that the world doesn’t work the way he thinks it works.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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