A Hippocratic Oath for Monetary Policymakers?

Monetary authorities can control the interest rate or the exchange rate, but not both. 2015 has witnessed a startling array of ‘monetary stimulus’ measures around the world, with varying degrees of success.

The ECB has acted to aggressively lower interest rates in Europe by buying bonds across the curve. Lower interest rates arguably lead to more real investment. Meanwhile, the Euro exchange rate has depreciated significantly making exports more attractive to foreigners. It would appear that the interest rate and the exchange rate are being nice to the ECB.

Singapore’s MAS, conversely, engineered an emergency mid-meeting currency depreciation in January but this has triggered higher domestic interest rates. Fear of further depreciation has caused a capital flight, drying up liquidity. The benefits to Singapore’s exporters from a more competitive exchange rate may well be offset by higher investment costs. The Bloomberg grab shows 3 month TBill yields in Singapore rising while German TBill yields have fallen.

These two cases stand in stark contrast: both the ECB and the MAS tried to achieve the same outcome, but one failed while the other succeeded. While we can argue the pros and cons of active monetary policy, it must be disconcerting to our policymakers that no matter which lever they pull (interest rates or exchange rates), the other lever is basically unpredictable, and can inflict all sorts of damage…

“First, do no harm” – so starts the hippocratic oath for medical practitioners. What wonderful advice for monetary policymakers this is! As Janet Yellen contemplates raising interest rates in the US for the first time in seven years, imposing a hypocratic oath on monetary policymakers might be worth considering…