The key to central bankers' dilemma: how to set interest rates is really the lack of knowledge about the reasons why the natural rate of interest rate is in decline /Robin Harding, FT, 29 July 2020/.
There might be many reasons for that. The Moore-law resulting in a deflationary path for prices across the board, the Modigliani-law for the spending of youngers and elders, derivatives, computerized SEs and the loose monetary policies of global central banks all play their part in it.
The main reason is probably the nature of modern finance, where Heisenberg’s uncertainty principle is as important as in the quantum world. It means that everything is quantum, because probabilistic and uncertainty issues are incorporated from the outset.
Central bankers can err on two opposite sides. We can pursue either too tight or too loose monetary policies. Japan really erred on the first one, the result was indeed two lost decades.
We deliberately err on the loose side and we are neither the culprits nor the saviors – or we are both, as you like it. We choose a hopefully less harmful way out of this new quantum world of finance.
Governor Matolcsy, MNB, the Central Bank of Hungary
