Tuesday, March 10, 2009

Light at the end of the tunnel?

Light at the end of the tunnel? Jean-Claude Trichet suggests the global economy may be bottoming out. Expansionary elements of the economy he mentions include interest rate cuts, government stimulus packages and falling commodity and oil prices. Trichet claims that the financial markets are currently underpricing the upside potential in the market. He does, of course have an incentive to state this opinion, because confidence will be one of the main drivers of the economic recovery; "He said a return of confidence was the key to getting the economy back on its feet". However, he also has to retain credibility so overall I think this is an optimistic sign for economic recovery.



Martin Ryan said...


I like your idea that Trichet has dual incentives, to:
(a) create confidence, and
(b) maintain credibility

I can't help but think of cognitive dissonance here - it's summed up as the "uncomfortable feeling caused by holding two contradictory ideas simultaneously"


But I don't think it applies in this case... the credibility constraint has to be fully binding, surely?

Alan Fernihough said...

I'm a bit sceptical about the idea that Trichet has to retain credibility. Surely, if the Eurozone economy continues to contract and the markets continue to plunge - the effectiveness of the ECB's monetary policy and Trichet's competence will be called into question anyways.

In my opinion, Trichet has nothing to lose and everything to gain by saying this. I wholeheartedly approve. The words of central bankers can have huge impacts on the market. Greenspan in the mid-90's (http://en.wikipedia.org/wiki/Irrational_exuberance) is probably the most foremost example.

Liam Delaney said...

forget trichet - shortly after Cathy started posting on the blog I received the following news from the BBC. I attribute it to the confidence effect of knowing that Cathy is still thinking about macroeconomic issues despite working with us!