92 - Ángel Ubide on Getting Central Banks Out of Their Comfort Zones

Episode Summary

Executive Summary: Angel Ubide argues that post-2008 monetary policy was too cautious because central banks overlearned the 1970s inflation episode and became trapped by narratives about debt, risk, and “normal” interest rates. He urges more symmetric, goal-oriented policy: higher inflation targets, greater tolerance for overshoots, larger balance sheets, broader asset purchases, and better communication.

Main Topics: Paradox of risk and monetary prudence: Ubide defines prudence as taking the right amount of risk, not the minimum. He argues that overly cautious central banks can make recessions and deflation worse by failing to act decisively. Narratives, bias, and policy mistakes after the crisis: The conversation emphasizes how dominant stories—especially about the 1970s, Greece, debt, and excessive risk-taking—anchored policymakers into overly defensive responses that prolonged weakness. ECB, Germany, and politicization: Ubide discusses how German skepticism, legal challenges, and fears about QE politicized the ECB and delayed aggressive easing, though he says the ECB ultimately delivered effective stimulus. Lessons from the Great Recession and Japan: The speakers highlight how monetary policy works through risk-taking and expectations rather than sheer money quantities, and how Japan was not uniquely incompetent but subject to the same low-inflation trap. Policy framework reform: higher targets and symmetry: Ubide proposes raising inflation targets, using dual mandates more aggressively, and allowing temporary overshoots so central banks can restore nominal demand and create room to cut rates in future recessions. Forward guidance, balance sheets, and asset purchases: He argues central banks should use large balance sheets, buy a wider range of assets when needed, and calibrate forward guidance cyclically—more commitment in downturns, less in booms. Debate over nominal GDP targeting: Beckworth raises nominal GDP level targeting as an alternative; Ubide is skeptical because of data revisions, communication difficulties, and the risk of constraining real growth, preferring flexible inflation targeting with a dual mandate.

Key Arguments: Central banks should aim for prudence, not minimal risk-taking; failing to take enough risk in a slump can make the economy more fragile. Post-2008 policymakers were too haunted by the 1970s inflation experience, causing an asymmetric fear of overshooting that kept inflation persistently below target. Narratives matter: if policymakers misdiagnose a crisis as primarily debt-driven, they will impose contractionary policies that worsen recovery. ECB caution was amplified by German politics and legal objections to QE, delaying a more effective response that the Fed and Bank of England adopted earlier. Monetary policy operates through expectations, interest rates, and risk-taking—not simply through the size of central bank balance sheets or money aggregates. A higher inflation target would give central banks more room to cut real rates in future recessions and better preserve nominal demand. Central banks should be willing to buy a broader set of assets, including corporate bonds, when safer asset purchases are insufficient to restore demand. Forward guidance should be used symmetrically: strong commitment in recessions, less transparency about the exact path when inflation and risk-taking are high. Nominal GDP level targeting may be conceptually attractive, but Ubide favors flexible inflation targeting because it is easier to communicate and less restrictive for real growth. The best policy frameworks are those that force regular review, public scrutiny, and symmetry around the target rather than persistent undershooting.

Data Points: ECB inflation target: close but below 2% - Discussed as the ECB’s price stability definition and the benchmark for symmetric policy German/Eurozone inflation: about 1% - Ubide notes inflation had remained around 1% for several years, motivating continued easing ECB big QE and negative rates: end of 2014 - He says the ECB’s decisive shift to negative rates and large QE came only by late 2014 Bank of England inflation: close to 5% at points - Used to illustrate that the BoE tolerated temporary overshoots while maintaining credibility U.S. inflation undershooting: below 2% since mid-2008 except for four months - Cited as evidence that the Fed’s 2% goal was not being symmetrically achieved Spain current account deficit: 10% of GDP - Example of large external imbalances correcting without the drastic competitiveness collapse initially feared U.S. money market funds crisis: one crisis event - Referenced in discussing why the Fed may have been reluctant to go negative on rates Federal Reserve exit principles: 2009–2010, six years too early - Used to illustrate that the Fed was thinking about exit long before recovery was secure Great Recession fear window: 2008–2009 - During this period survey concerns about inflation remained elevated despite recession and disinflationary pressures Inflation target proposal: 3% to 4% - Ubide’s longer-run suggested target after gradual opportunistic reflation over several cycles

Pivotal Quotes: "All course of action are risky, so prudence is not in avoiding danger, but in calculating risk and acting decisively." — Angel Ubide: Used to frame the book’s central concept that policymakers should not confuse caution with wisdom "What feels wrong is the right thing to do." — Angel Ubide: Explaining why low rates, QE, and other extraordinary tools can seem unnatural even when they are appropriate "We should stop calling things unconventional. Everything is conventional." — Angel Ubide: A recommendation that central-bank tools be normalized rather than treated as exceptional

Implications: Listeners should expect future crises to require faster, bolder, and more symmetric central-bank responses. The book argues for framework reform now—higher inflation tolerance, broader tools, and clearer communication—to avoid repeating post-2008 stagnation.