Irrelevance Result for Systematic Monetary Policy

For the U.S. and nations in Europe today, it’s common for the central bank to implement countercycle monetary policy. That means reining in the money supply when the economy is booming, and accelerating money when there’s a recession.

While some economists believe this affects the economy in the way the central banks are aiming for, other economists beg to differ. They say that people know what to expect from the central banks from their predictable behavior based on the economy. Since people have expectations, they adapt to them, raising or lowering prices accordingly, which kind of takes the corrective power out of the central banks’ hands.

Because there’s no element of surprise, people adjust accordingly to what they expect the Fed to do, resulting in no change at all...called the “irrelevance result.”

In other words, when the Fed jumps up behind you and says surprise! with their monetary policy, that’s when it works. But when you know the Fed is there (and you prepare accordingly for the impending “scare”), well, then you’re not so scared, so the surprise fails to have an effect on you.

When people respond to the predictable behavior of the central bank’s monetary policy, they call it the irrelevance result for the systematic monetary policy. It’s “irrelevant” because the monetary policy didn’t have an effect, and it’s “systematic” because people were not surprised….not at all.