Maradona’s contribution to monetary policy

Via FTAlphaville:

Sad news from Argentina today. Diego Maradona, one of the most gifted footballers to ever play the game, has died.

While his dribbling prowess was world renowned, fewer people know that his skills were used to construct one of the most memorable monetary policy analogies of all time.

Back in 2005, then Bank of England governor Lord Mervyn King described the two goals that the Argentine scored against England in the 1986 World Cup to show how central bankers had modernised.

Both goals were memorable. Each for totally different reasons. The first, the so-called “Hand of God” goal, saw the 5ft-5in-forward beat England goalkeeper Peter Shilton to the ball with an outstretched fist. This, Lord King said, summed up the old “mystery and mystique” approach to central banking. It was “unexpected, time-inconsistent and against the rules”.

The second? Well here’s how Lord King put it:

Maradona ran 60 yards from inside his own half beating five players before placing the ball in the English goal. The truly remarkable thing, however, is that, Maradona ran virtually in a straight line. How can you beat five players by running in a straight line? The answer is that the English defenders reacted to what they expected Maradona to do. Because they expected Maradona to move either left or right, he was able to go straight on. Monetary policy works in a similar way. Market interest rates react to what the central bank is expected to do. In recent years the Bank of England and other central banks have experienced periods in which they have been able to influence the path of the economy without making large moves in official interest rates. They headed in a straight line for their goals. How was that possible? Because financial markets did not expect interest rates to remain constant. They expected that rates would move either up or down. Those expectations were sufficient – at times – to stabilise private spending while official interest rates in fact moved very little.

Here’s the goal. It’s a real beauty.

RIP to a true footballing genius.

David Llewellyn-Smith

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