On a July morning in 2012, the head of the European Central Bank told a room in London that he would do whatever it took to save the euro, and then added two words: believe me. The program he went on to design was never used. A new essay asks how a sentence can do the work of a policy, and what it costs to keep one.
Why we’re pointing you there
This week’s Nobel in economics went to Robert Hall and Michael Woodford, and Michael Cummins reads their theory as a theory of promising. Hall showed in 1978 that tomorrow is already inside today’s spending. For forty-six years he also chaired the committee that dates America’s recessions, the economy’s official narrator, always speaking after the fact. Woodford built the model central banks now use, and wrote that guidance must offer “a ‘promise’ and not merely a ‘forecast.’” Three years later Janet Yellen said of the Fed’s dot plot, “that’s not a promise.” Between those two sentences the essay sets the promises that held and the one that broke: the Swiss National Bank’s floor under the franc, called the cornerstone of its policy three days before it was abandoned, when the franc jumped almost 30 percent in minutes.
Then the turn. The fall in inflation after 2022 is being told as the theory’s triumph, but the economists who have studied it most closely disagree about why it happened, and the laureate himself spent the 2010s building a listener who believes less. Meanwhile the listener is changing: from a television anchor reading the thickness of Alan Greenspan’s briefcase to futures trading three milliseconds after a Fed release. The essay says plainly that it was drafted and edited with Claude, and it ends on one question: if the listener a central bank speaks to has read every promise it has ever made, what is a promise still worth?
Essays & Reviews for the Intellectually Curious
