Axel Weber, chairman of UBS Group, has some pedigree in being a contrarian.
In the dark days of Europe's sovereign-debt crisis, the former Bundesbank president was so incensed over the European Central Bank's emergency bond-buying strategy that he quit his job in 2011.
Now, he's telling the broader world of central banking that they're on the wrong track.
In a paper released this week on Project-Syndicate.Org, Weber argues that the orthodox regime of inflation targeting that exists at most of the world's major central banks -- the U.S. Federal Reserve, the ECB, the Bank of Japan -- is no longer fit for purpose.
Weber's thesis is that the strategy, which focuses on hitting an arbitrary target for price increases in a selection of consumer goods, only views the monetary world with one eye. As a result, it ignores the kind of financial buildups in asset prices and indebtedness that caused the last meltdown.
"The 2008 global economic crisis, from which the world has yet to recover fully, has cast serious doubt on this approach,'' Weber wrote.
With most central banks now undershooting their inflation objectives, targeting of the consumer price index has come under renewed scrutiny in academic circles. Proposals range from setting higher inflation goals to spur growth, to choosing completely different bullseyes to hit (or not), such as nominal GDP.
In Europe, a strict focus on the quantity of money circulating in the economy has fallen out of fashion. While the ECB ''cross-checks'' inflation developments against the monetary aggregates in its policy analysis, a 4.5- percent reference rate for broad-money growth is hardly ever mentioned. The ECB stopped reviewing this reference rate more than a decade ago.
"CPI-focused monetary policy is distorting economic structures, blocking growth-enhancing creative destruction, creating moral hazard, and sowing the seeds for future instability,'' Weber wrote. Moreover, targeting inflation leads to "excessively expansionary and asymmetric monetary policy.''
Overcooking the monetary supply goes against his central-banking DNA. In an interlude between the Bundesbank and his move to the private sector in 2012, Weber taught at the University of Chicago -- academic home of Nobel Prize-wining economist and monetarism-founder Milton Friedman. His theory maintains that the quantity of money in an economy is the main determinant of incomes and inflation.
"For a monetarist, that's the prime address to go to,'' Weber said at the time.
Still, instead of a return to the straightforward monetarism that the Bundesbank preached in pre-euro times, Weber advocates the use of a broader range of targets for policy, from money aggregates to credit, interest and exchange rates as well as asset and commodity prices.
"Short-term consumer-price stability does not guarantee economic, financial, or monetary stability,'' he concludes. "It is time for central banks to accept this fact and adopt a comprehensive, long-term monetary-policy approach.''
Thanks to Maxime Sbaihi at Bloomberg Economics for drawing this paper to our attention
