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One thing that Japan and the US have in common (and the inflation targeters you mention don't) is that they are f-ing huge. A small open economy can make a very credible threat to raise the inflation rate by driving capital into other currencies. And of course, when Chuck Norris does this, he doesn't necessarily have to carry out the threat, and you may not see dramatic movements in the exchange rate. But for a large economy like US or Japan, the threat is not nearly as credible. I'm sure it would be credible for the US if the Fed had the authority to initiate foreign exchange intervention on the scale that China does, but this is where the Brando problem comes in. Legally, as I understand it, the answer to "What have you got?" for the Fed doesn't include foreign exchange unless the US Treasury requests it or unless the Fed can find some kind of excuse. It can't count on having enough excuses to make a credible threat. And being a large economy, it can't count on being able to do enough in the bond market to get the capital to leave voluntarily.

Andy: IIRC, AFAIK, the Bank of Canada has not done any forex market intervention since the early 1990's? It states that it will not intervene in forex markets, except in rare circumstances when trading becomes "disorderly" (or something like that).

Not sure about the other IT countries.

Anybody know for sure?

The Loonie has been much stronger than normal against the USD (our biggest trading partner by far) over the past 4 years. It dipped 15% for a few months in late 2008, but then came straight back up again in mid 2009.

"It sounds utterly bizarre to my Canadian ears to hear Americans dismiss Chuck Norris as an impotent Tinkerbell, who only exists if we all believe in him."

We do not have a Chuck Norris at this time. Bernanke has chosen a collegial approach with the rest of the Fed, so that the Fed does not speak with a single voice. Left to his own devices, Bernanke would presumably have done for the U. S. what he recommended for Japan. But he has not. In addition, when the Fed had room to take decisive action, back in late '08 and early '09, it, like both the Bush and Obama administrations, focused on preventing an economic meltdown, not on recovery. At present, neither the Fed nor the Presidency has credibility, and the Congress only has credibility in seeing that nothing gets accomplished.

Min: I tend to agree. Because the Fed does not speak with a single voice, it can't/won't bring in Chuck. (Pity the US rejected the monarchy ;) )

Or rather than the Regional Federal Reserve Banks ceased to exist and the only person who could speak to the public would be the Chairman. Voicing dissenting opinions in public would be cause for instant dismissal.

Determinant: I'm trying to imagine a deputy governor at the BoC saying (in public) "We should set a different interest rate because I think we need 1% (or 3%) inflation". It would never happen.

In private I'm sure they say "I think we should raise/lower the interest rate to hit our 2% target". It's their job to say that. And I can also imagine them saying "At the next renewal, we should switch to a 1% (or 3%) inflation (price level, whatever) target". Again that's their job.

But otherwise, they sing the party line.

Is chuck norris a popular actor in Canada?

He is hardly present in the US for ten years now. There is a delicious irony in your choice of illustration.

Jon: I don't think he's any more or less popular here than in the US. It's all the Chuck Norris jokes I see on the internet that inspired the metaphor. A running theme of the jokes is that things just happen without Chuck actually doing anything. "Chuck Norris walks into a restaurant. All the women are immediately pregnant".

Nick Rowe: "(Pity the US rejected the monarchy ;) )"

Wait until Ann Coulter becomes President. ;)

Chuck Norris is 71. He doesn't do much of anything anymore.

Lord: No. Chuck Norris is not 71. 71 is Chuck Norris.

Canada doesn't need Marlon Brando, but the US does. Forex intervention isn't necessary for a small open economy, because you can get investors to abandon your currency voluntarily by making assets denominated in it sufficiently unattractive. Changes in Canadian interest rates (actual or expected) can induce portfolio shifts pretty quickly, because nobody outside Canada feels any particular need to hold Canadian bonds in their portfolio if they can get a better deal elsewhere. It's a lot harder for a large economy, especially one like the US, whose currency is perceived as a safe haven.

Actually, though, the example of Switzerland kind of suggests that we're both wrong. The SNB seems to be having a lot of trouble meeting its objectives in spite of its forex intervention, and in spite of presumably high credibility (and Switzerland has arguably been below the zero lower bound for a while now: if you make a large deposit in a Swiss bank, don't expect to be able to withdraw the entire amount). I would argue that, financially speaking, Switzerland is treated somewhat like a large economy even though it's actually small.

Have to agree with Andy H. Looks like devaluation to me. Why not show graphs for....





Last I heard, Canada and Australia have commodity booms driven by U.S./China demand. Not sure their CBs need do anything. What happens to Canada/Australia if world commodity demand collapses? Would you be willing to bet the BOC alone could keep rates above the ZLB?

How did Canada's fiscal stimulus compare in magnitude per capita to the US's? Arguably Canada had the ability to increase debt loads more than the US did, through insured home loans and increasing household debt (almost all of it in effect backstopped via government insurance or low LTV) as well as a marked increase in federal debt. The US/JP could not lever up housing because their real estate markets were already overindebted.

So though I don't have the #s in front of me I think there's a good case that fiscal stimulus in Canada was meted out in a way that would make even Keynes blush. The rebounding commodity boom didn't hurt either, of course, but the "wealth effect" due to levering up housing was one of the most effective ways I've seen, in the history of non-war stimuli, of increasing GDP after a severe recession. I think what Canada did should be published in textbooks under "When Chuck Norris invokes Keynes".

The BoC can be credible I think because its other half -- the fiscal half -- stepped up to the plate like a boss.

Andy wrote: The SNB seems to be having a lot of trouble meeting its objectives in spite of its forex intervention, and in spite of presumably high credibility

What trouble are you talking about? They're certainly hitting their target, the exchange rate has been spot on ever since they announced they would buy Euros in whatever amount it takes to keep it at or above 1.20 to the Franc. Do you mean they actually had to intervene, as opposed to just threatening to?

The critical issue that the US exchange rate is controlled jointly by the Kindom of Saudi Arabia and the peoples Republic of China. The price of the currencies of the other countries that your mentioned are market determined.

But the BoE isn't hitting its inflation target, is it? I thought it was actually completely missing it.

vimothy: Well, that's debatable. Current inflation is certainly well above target. Whether that's mostly just temporary price shocks due to VAT increase, that a forward-looking inflation targeting central bank should ignore, is what the debate is about. But it would be very hard to claim that the BoE hasn't been able to loosen monetary policy to prevent inflation falling *below* target.


I second Oliver's question. The SNB annouced a floor of 1.20 and the currency moved instantly to that level (a drop of 8%) and has not fallen below it despite ongoing stress in the euro zone and a rally in other safe-haven currencies like the JPY. If the SNB annouced tomorrow that it was moving the floor to 1.30, do you really doubt that the market would move there instantly?

It's just like when FDR and his team annouced what the new price of gold would be, gold moved to that level.

I see the mostly excellent Andy Harless already made the same point as I was making above (with rather less snark).

You should see how much the SNB had to increase its balance sheet in order to hit the 1.20 floor.

See http://www.snb.ch/ext/stats/statmon/pdf/deen/Stat_Monatsheft.pdf

Assets rose from CHF250B to CHF366B in one month. So as Andy says, they definitely had to expend some energy to achieve this.

"The SNB seems to be having a lot of trouble meeting its objectives in spite of its forex intervention, and in spite of presumably high credibility."

High credibility? They've been saying they'd "act decisively" to prevent any appreciation of the CHF for two years almost, and it kept rising.

See this for instance from Dec 2009:


Gregor and Oliver,

I didn't mean the SNB was failing to achieve its (only recently instituted) exchange rate objective but that it has been having trouble generally, over the past several years, achieving its general macroeconomic objectives (hence policy has had to become more and more aggressive -- the Swiss Chuck Norris has had to keep beating people up for three years and we still aren't sure if the room will be cleared).

JP Koning,

My impression of "high credibility" refers to the SNB's long-term record. But perhaps that credibility is only one-sided. Indeed, this may be a general problem, that having more credibility against inflation leads to having less credibility against deflation, which is contrary to the way Nick and Stephen would presumably see it.

I suppose the Swiss Chuck Norris would be called something like "Chuque Noiresse" and one can kind of imagine why he would have credibility problems.

Just discovered that the "politically correct" counterpart of Chuck Norris is Puff, the magic dragon - to whom kings bowed and pirates brought down their flag!

"You should see how much the SNB had to increase its balance sheet in order to hit the 1.20 floor."

That link shows stats for the end of August, prior to the devaluation. The only stats we have for September:


showed an 11% increase in reserve assets as valued in CHF, which was tiny compared to the movement in the CHF vs the EUR and USD.

The ECB has $55b in Greek bonds, $156b in total PIGS bonds. A 50% haircut on Greek debt would cost them about $10b (their bonds were bought below par). ECB capital is $5.3b. So a Greek "credit event" would force the ECB to go to national governments for more capital. In a European double dip scenario, fiscal losses would escalate for EU governments as a result of the ECB "SMP" (asset purchase) program.

Fiscal losses caused by ECB PIIGS holdings expose the fact that asset purchases are fiscal policy unless they create demand for bank reserves. Asset purchases don't necessarily produce new a equilibrium. Granted, you could accuse the ECB of being too "tight" and blame monetary policy, but this accusation would be no different had member governments bought those bonds rather than the ECB.

Britmouse, you're right, the data is end of August. The number was so big when I first looked at it I just assumed it was end of September.

Mind you, given the huge rise in SNB foreign assets in August and the collapse in CHF/EUR beginning Aug 9 - this before the peg was even announced - the SNB was surely "beating up people" ahead of the peg announcement. Build up credibility first, then announce, it seems to me.

Britmouse and JP: Wow! If I understand you two correctly, you are saying that the data seem to suggest that all the beating up had little effect *before* the announcement. And very little additional beating up was needed after the announcement?

Here Michael Roberts quotes Robert Hall's reasoning on why the Fed is reluctant to adopt IT:

"...if the Fed were to target inflation it might not work, and if it didn't work, then everyone would lose faith in the Fed, and that would then hurt efficacy of the Fed's actions going forward."

In other words, the Fed fears that Bruce Lee might appear from nowhere, and beat Chuck Norris to death in Roman Colosseum. And if people believe that might happen, that is, if they suspect liquidity-trap dragon might be stronger than the Fed, the threat the Fed is going to make would be neutralized - at least to some extent.

We keep coming back to the fact that the Fed is constrained by the Federal Reserve Act; Congress has told Chuck he can't run around beating-up whomever he likes.

What about the BoC? Say something happened that got us stuck in a liquidity trap (maybe one of our big banks somehow failed and blew-out a chunk of the economy). To maintain the inflation/NGDP level target can the BoC just print money and start buying whatever it wants?

Nick, I'm not sure you can say the beating up had little effect before the SNB announcement.

On August 3, the SNB announced it would be purchasing CHF50b in assets to drive EUR/CHF up. Over the next five days it purchased this amount, but the CHF continued to strengthen. On the 10th the SNB announced it would be purchasing an additional CHF40b in assets, which it proceeded to purchase over the next five days. The CHF finally started to weaken. On the 17th, the SNB announced it would purchase another CHF80b in assets. The data shows that it executed this full amount by the end of the month.

EUR/CHF went from 1.02 on August 10 to 1.19 by August 28, so a lot of speculators were hurt. It fell back to 1.10 in the next four trading days, and then on September 6 the peg was announced. Presumably the announcement of the peg drove EUR/CHF back up to 1.20 but seems not have required as much effort, although I'd wait to see the SNB's next monthly bulletin to be sure.

"We believe that the Bank of Canada will carry out its threat to do whatever it takes for as long as it takes to bring inflation back to the 2% target. And we've watched it carry out that threat, on the rare occasions it needed to."

Nick, do you have any examples of the BoC carrying out its threat?

JP Koning:
Wasn't the Great Canadian Slump (1990-!996) a good beating to remember and believe the threat?

I was just a kid!

What exactly did the BoC threaten and who got hurt?

6 years of subpar growth. And a good excuse to slash education and social budgets?
Am I that old? ( yes. A student of mine was born in 94...)


The SNB data is now out for September.


Expansion of forex reserves went from CHF 255bn in August to 282bn in September - a 10.6% rise. The CHF devalued 7% month-on-month against the EUR, 11% against the USD, and 12% against the JPY, those three make up 90% of the SNB foreign currency reserves.

Value of forex reserves in USD actually fell. I'd say that's good evidence not much beating up was required. Interesting to see future months.

Yes, thanks.

Another point to consider is that in addition to purchasing forex the SNB has also been buying back SNB debt certificates since early August. So you also have to consider the decline in liabilities outstanding (specifically column 22) as part of the entire expansionary purchase program.

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