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July 3, 2008

Path Dependency in the Economy

This quote from a Deutsche Bank report on the differing approaches to rate-setting in the EU and in the U.S. is fascinating and instructive:

Recent and prospective differences between the Fed and the ECB in the conduct of monetary policy have been striking. The ECB has launched a Martian frontal assault on inflation while the Fed has opted for a more cautious and patient Venusian approach.''

The historical experience of deflation and depression in the U.S., and of German hyperinflation and currency reform in Europe, plays a key role in shaping different responses.

I hadn't thought of it that way, but it strikes me as correct. Both regions see the current market problems through the prism of their most traumatic similar economic experience -- and in the U.S. that's the Great Depression, and in the EU that is German hyperinflation. It is a lovely example of path dependency in the economy, with policy approaches differing not on where we're going, but on how we got here.

[DB via Bloomberg]

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