Between Mervyn King and Jay Powell
Between Mervyn King and Jay Powell
Macro D Guest Post
This morning, at dawn, I was having breakfast; there was not even a shadow of the sun outside the window; on the other hand, a sliver of light crossed my boiling black coffee, forcing me to submit to the law of memory.
Does the name Mervyn Allister King ring a bell? He was the first governor of the Bank of England to be received in the audience by Queen Elizabeth II, but I love to remember him for another reason. Considering that he governed the BoE from 2003 to 2013, he had many opportunities to express his monetary opinions, but I hid one in particular in the room of memories.
The year 2005: He took as his inspiration the goal of Diego Armando Maradona against England at the World Cup in Mexico in 1986, the most famous in the history of football, the "goal of the century". King's unique approach was to use this bit of football bravado to explain how central banks are able to influence investors' expectations even without doing anything special, often and willingly, even without having their hands on the main detonator: interest rates.
What did Diego do? He took the ball in midfield, spun around two opposing midfielders, then ran to dribble past Terry Butcher, Terry Fenwick, and goalkeeper Peter Shilton and put the ball in the net before Kenny Sansom intervened. In 11 seconds, Maradona crossed half the pitch, going straight and caressing the ball 12 times. In King’s opinion, Maradona’s technical gesture is a clear demonstration of the power of expectations that can be applied to modern interest rate theory, which explains the relationship between central banks’ decisions to move interest rates and the subsequent performance of the economy. King’s exact words:
“Maradona ran 60 meters from his half, dodging five players before shooting the ball into the England goal. The truly remarkable thing, however, is that Maradona ran practically in a straight line. How can you avoid five players by running in a straight line? The answer is that the English defenders responded to what they expected Maradona to do. And while they expected Maradona to go left or right, he managed to go straight. Monetary policy works similarly. Market interest rates follow what the central bank is expected to do.”
The central bank would be Maradona, while interest rates would be the opposing players.
Let's come to the present day: