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Wednesday, June 16, 2021

Hayek’s Tiger

Local News

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The Chief Economist of the Bank of England, Andy Haldane, listens from the audience at an event at the Bank of England in the City of London, Britain, April 27, 2018. (Toby Melville/Reuters)

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News and Views

Well, you didn’t think that topic wouldn’t rate a mention . . .

From the U.K.’s New Statesman, an article by the Bank of England’s chief economist, Andy Haldane. Much of this, unsurprisingly, is focused on the U.K., although much will also strike a note with American readers, not least this comparison between the policy responses to the financial crisis and the arrival of COVID-19 (my emphasis added):

During the Covid crisis, central banks have ­followed the same playbook as after the global financial crisis: a large and rapid crisis was met with a large and rapid monetary policy response. But after the global financial crisis, the economy recovered slowly so monetary policy was normalised slowly.

This time is very different. The economy is rebounding rapidly. Yet the guidance issued by central banks implies a path for ­policy normalisation every bit as sedate as after the global financial crisis. Having ­followed the global financial crisis playbook on the way in – rightly – there is a risk central banks also follow it on the way out. This would be a bad mistake. If realised, this risk would show up in monetary policy acting too late.

Friedrich Hayek once referred to inflation as the tiger whose tail central banks hold, usually with trepidation and ideally from a safe distance. If central bankers wait to see the whites of this tiger’s eyes before acting, they risk having to run like the wind to avoid being eaten. Waiting too long risks interest rate rises that are larger and faster than anyone would expect or want. It runs the risk of the brakes needing to

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State News

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