Mark Carney, former head of the Bank of Canada, has been announced as the new head of the Bank of England, replacing Mervyn King. Much has been said of his appointment with respect to the banking system and financial regulation. Canadian banks were relatively stable during the financial crisis, and Carney has gone on the record stating that relatively simple regulation of banking sectors (like the early Basel system) is not sufficient for creating stable financial industries.
Matt Yglesias has also discussed the implications of Carney’s appointment for the market for central bankers, as the frontrunner for the position before Carney’s announcement was Paul Tucker, BoE’sdeputy governor responsible for financial supervision. Like investors often seem to have a home capital bias, Yglesias has argued that perhaps Governments also suffer from ‘home central banker bias’, appointing new heads of central banks based on typical corporate succession heuristics, ignoring international options. He has even argued in the past that a good central banker would be worth paying the output gap that would have occurred under a counterfactual scenario (a different central banker in charge) amounting to a large chunk of GDP. Perhaps different countries bidding trillions of dollars for central bankers determined by some hypothetical counterfactual is an unlikely scenario, but it is true that effective central banks and their staff are immensely valuable, and ineffective central banks and their staff are immensely costly. Just ask any Zimbabwean.
What I have not seen discussed in detail, and what I think is perhaps most interesting, is that Carney will now be a driving force in setting monetary policy for a country at the zero lower bound for the first time in his career. All major countries facing the ZLB have been enveloped in recession or deep stagnation, with the Japanese experience now lasting for two decades. Even Ben Bernanke, who sternly admonished the Bank of Japan for what he perceived as self-inflicted paralysis in 2003, has presided over an economy with a significant output gap and zero rates for almost five years.
Academic debate over the effectiveness of monetary policy at the ZLB rages today. Carney is considered successful because the economy of Canada survived the financial crisis in much better shape than itsneighbour, however whether he could have achieved the same outcome if he had struck the ZLB is one of those elusive counterfactuals.
To be fair, not even the most ardent of the market monetarists, like Scott Sumner, will argue that England’s experience in the last five years is purely due to monetary policy. Nevertheless, Carney’s appointment to the BOE will be in some sense a litmus test for the monetary policy regime he ran in Canada.
Was the effectiveness of monetary policy in non-ZLB countries like Canada and Australia a fluke? Does the ZLB make monetary policy largely impotent? And are some central bankers significantly more effective than others? Mark Carney’s legacy may rest on the answers to these questions. If he can’t get the answers right, his appointment may turn out to be a poison chalice.