Central banking seemed to have reached an “end of history” moment in the mid-1990s,
when inflation targeting spread round the world after its success in New Zealand.
A generation later, history has started again, with unpredictable consequences.
R-star is the equilibrium real interest rate, while u-star is the natural rate of unemployment. Both stars seem to have been falling in recent years, the Fed has had trouble catching them
The ECB has even more reason than the Fed to examine its navel: annual inflation has fallen even shorter of the 2% target. The last time inflation was above 2% was 2012
ECB also has the German Federal Constitutional Court to worry about.
Howard Davies, Project Syndicate 16 September 2020
Howard Davies, the first chairman of the United Kingdom’s Financial Services Authority (1997-2003), is Chairman of the Royal Bank of Scotland.
He was Director of the London School of Economics (2003-11) and served as Deputy Governor of the Bank of England and Director-General of the Confederation of British Industry.
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