Mervyn King

I have reached the conclusion that, now that the country is at last aggressively addressing the problem, the most important single element in our successfully navigating through the challenges presented by the "millennium bug" is how the public responds to it. There are very few places in our national life where the statement that "attitude can affect outcomes" is so compellingly demonstrated as in the banking sector, particularly as we work to address Y2K.

When I joined the Bank of England in 1991, I was fortunate enough to be invited to dine with a group that included Paul Volcker.  At the end of the evening I asked Paul if he had a word of advice for a new central banker.  He replied--in one word--"mystique."  That single word encapsulated much of the tradition and wisdom of central banking at that time.

The great Argentine footballer, Diego Maradona, is not usually associated with the theory of monetary policy. But his performance against England in the World Cup in Mexico City in June 1986 when he scored twice is a perfect illustration of my point. Maradona’s first “hand of God” goal was an exercise of the old “mystery and mystique” approach to central banking. His action was unexpected, time-inconsistent and against the rules. He was lucky to get away with it. His second goal, however, was an example of the power of expectations in the modern theory of interest rates. 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.