Paul Krugman writes:
Two things to bear in mind. First, having in effect thrown away its credibility – in today’s world, the crucial credibility central banks need involves, not willingness to take away the punch bowl, but willingness to keep pushing liquor on an abstemious crowd – it’s hard to see how the SNB can get it back. Second, there will be spillovers: the SNB’s wimp-out will make life harder for monetary policy in other countries, because it will leave markets skeptical about whether other supposed commitments to keep up unconventional policy will similarly prove time-limited.
Brad DeLong and Scott Sumner agree the Swiss move was a bad idea. We’re all in accord on the economics (more or less), but I am more interested in a different question. The Swiss central bank, had it continued the peg, probably would have had a balance sheet larger than Swiss gdp. But does this matter? Should anyone care? Or does that make them “too big a guy on the block”?
I see two views of the world running around in these discussions, but not always articulated as such:
1. Bureaucrats, which includes central bankers, are not so much budget maximizers as hoarders of institutional capital. They hoard institutional capital when they should be spending it down, in the interests of the broader polity. So this is a public choice problem, rather than a matter of macroeconomic ignorance. When it comes to macroeconomics, we need institutional reforms which induce them or maybe even require them to spend down this capital, come what may for their personal levels of political influence.
2. Bureaucrats hoard and indeed extend institutional capital because they know how important it is to maintain the quality of significant institutions, such as central banks. Without such capital , semi-independent central banks would soon cease to exist, to the detriment of us all. Outside academics, however, rarely can see the importance of this factor, because they have less experience running political institutions. When smart central bankers — which yes includes the Swiss — are apparently doing the wrong thing, it is because they are seeing more variables of the problem than we are. They either cannot do “the right thing,” or doing that would be too costly in terms of the country’s longer-term institutional prospects.
By the way, there is also #3, which I do not find credible:
3. The Swiss central bankers suddenly became stupid and forgot their macroeconomics.
I agree there is plenty of #1 out there, maybe for Switzerland too. But I’d like to see more debate of #1 vs. #2, because I don’t think the Swiss central bankers — praised extravagantly by many of us not too long ago — simply would tank their economy for no good reason at all.
Addendum: Here is Dean Baker’s dissent, although I think the stock market does not agree. And Scott Sumner comments, he seems to opt for #3. Here are useful comments from the FT.