Maradona’s contribution to monetary theory
There’s plenty of high-quality prose on the internet to read about the legendary footballer, Diego Maradona who passed away earlier this week. Most of them glorifying his legendary footballing skills, but some even critical of his infamous lifestyle off the pitch. But no one can take away the joy his game brought to millions of football fans across the world. This however, is a short piece by Claire Jones at the FT Alphaville recounting a 2005 comment by Lord Mervyn King, the then Governor of Bank of England (ironically a country that Maradona didn’t hide his hatred towards) using Maradona’s two goals in the 1986 quarter-final against England to explain changes in monetary theory:
“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”
Mario Draghi, the former ECB boss might just have taken central banking modernity to the next level with his famous “Whatever it takes” statement.