Home > Economics, Things that keep me awake at night, Things that make me want to scream > A quick and utterly terrifying note on the ECB’s online monetary policy game

A quick and utterly terrifying note on the ECB’s online monetary policy game

December 14, 2011 Leave a comment Go to comments

So, I finally took up Matt Yglesias’ suggestion and played around with the ECB’s online monetary policy game. And as he said, it’s pretty revealing. The first time I played, I was very aggressive in cutting interest rates in response to demand shocks, and I even cut rates in response to a supply shock. By 2018, unemployment was at under 4%, but inflation over the period had been c.4.5% with medium variability (mostly due to an oil supply shock, which I cut rates in response to). I got no stars.

Then I decided to try and play it how the ECB wants me to play it. After a number of attempts , I eventually managed to get one star. In this scenario, inflation averaged 0.36% with high variability. I got one star (woo!) – even though unemployment was at over 10%. 

And then I played again. I got an average inflation rate of 1.24%, with medium variability. This was deemed worthy of two stars (double woo!). Only thing was, the unemployment rate at the end of the period was 9.81%. I then managed to get two stars again, with an inflation rate of 1.65% with medium variability – but on the way I managed to plunge Europe into a second Great Depression, with unemployment running at a whopping 13.13% in 2018.

This is, of course, completely insane. The whole purpose of keeping inflation low and stable is because it is believed by very serious people that this is the most conducive monetary policy for – wait for it – economic growth and full employment!

Oh and by the way, at one point I had inflation running a little out of control at c.5% in 2017. I increased interest rates from 5.25% to 25% (just to see what would happen), and inflation kept on rising and showed no signs of coming down. On another attempt I let inflation get to c.5% in 2013, and even five whole years of 25% interest rates was not enough to bring inflation down. So, for my own peace of mind, I’m going to assume that this is a bug in the game and not indicative of some crazy model inside the minds of the ECB. Because I would really hate to think that the ECB believes they couldn’t control an inflation rate in the mid single digits by increasing the interest rate by two thousand basis points.

Sadly, announcing an 5% NGDP target (or, indeed, making any communication to the  market) was not an option. So the game also perpetuates the myth that the only thing that central bank can ‘do’ with regards to monetary policy is increase or decrease the interest rate.

It must be nice to get two gold stars for your monetary stewardship, while being insulated from the impact of continent-wide double-digit unemployment.

  1. April 28, 2014 at 5:35 pm

    Wow, this piece of writing is fastidious, my younger sister is analyzing these kinds
    of things, thus I am going to convey her.

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