Signaling problems

So far, nobody has pointed out that Miley Cyrus and Mark Carney have something in common, besides the same initials. Let me rectify this appalling omission.

The thing is, both have faced the same problem - of how to signal a break with the past, given their audiences' established priors.For Ms Cyrus, the problem has been to establish a break with her wholesome Hannah Montana image. For Dr Carney, it has been to show that the Bank is now more of a monetary activist, keen to use monetary policy to bolster the economy.

And both have faced the same twin dangers - of either under-signalling or over-signalling. For Ms Cyrus, an under-signal would have meant trading on her past and looking like a has-been. For Dr Carney, it would have meant not sufficiently changing rate expectations and hence the monetary stance. Equally, though, there's also been a danger of over-signalling: for Ms Cyrus, this lay in looking over-risque, for Dr Carney it meant the risk that a signal of low future rates is also a signal (pdf) of weak future activity, which could be self-fulfilling.

Herein, though, the similarity breaks down. Whereas Ms Cyrus has perhaps erred on the side of over-signalling - her performance at the VMAs has been widely criticised as sluttish, as if that were a bad thing - Dr Carney has under-signalled. As Andrew Lilico has pointed out, rate expectations have risen since he gave his "forward guidance" because the knock-outs gave markets the impression that the Bank actually cares about inflation.

I suspect their next major signals to reverse this pattern - for Miley to appear demure, in a "womanly" way, and (barring a postive growth surprise) Mark to dampen rate expectations.

If I had the expertise, I'd model this as an interated signaling game with the possibilities of the audience being non-Bayesian, either by over-reacting or under-reacting.

Instead, I'll make a cheaper point. It's that we should not, perhaps, criticise Dr Carney too much. To have made an effective stimulatory over-signal, he would have had to say: "The economy looks like recovering nicely, so don't hold back spending for fear of recession, but even so I'll not raise rates." But the fact that the inflation target still exists rules this out. In this sense, pop stars have fewer constraints upon their judgment than central bankers.

Comments

[Ralph Musgrave]

“keen to use monetary policy to bolster the economy.” Brilliant idea.

As to QE (an element of monetary policy) that enriches the rich and destabilises less developed economies.

As to low interest rates, that channels stimulus into the economy just via investment, which skews the economy towards investment. You might as well channel stimulus into the economy just via restaurants, massage parlours and car production.

And we’ve just had a credit crunch sparked off by excessive and irresponsible lending, so the best cure is to cut interest rates so as to encourage . . wait for it . . excessive and irresponsible lending.

You just couldn’t make it up.

[William McIlhagga]

What's also interesting about both examples is the amount of fakery involved. The best signal for Ms Cyrus is not a tedious cliche involving very few clothes, but one decent song. That's beyond her, so she tries an unconvincing surface signal, rather than a convincing (because difficult) deep one.

For Carney, the deep signal is a willingness to take on the bankers. Since that will also never happen, a surface signal is used instead.

[ortega]

Of course sluttish is not a bad thing. Because there is no good or bad, right?

[Rich]

What confused me about this (Carney, not Cyrus - I'm hopelessly baffled about her) was what is the role of the Monetary Policy Committee in this? Is Carney overriding them? Does the whole MPC agree with this new policy?

[KHG]

Holey carp the drama perfectly encapsulates macro-economic policies AND 20-something sexual hierarchies!