- ex ante is Latin for before the event.
- ex ante means we look at future events based on possible predictions.
- ex post is Latin for after the event.
- ex post means we look at results and events after they have occurred.
Example of ex ante and ex post
There is an example of ex ante and ex post in this blog from Paul Krugman below about the decision of the Fed to raise interest rates.
Firstly, the Fed is raising interest rates in the US because:
- It predicts the economy is getting closer to full capacity with unemployment falling towards 5%
- The Fed is worried about the impact of leaving interest rates at zero for too long – Zero interest rates may cause future inflation. A small rate rise now, will help to prevent the economy overheating.
- Fears of an asset bubble if interest rates are kept at zero for too long
However, economists (such as Krugman) are critical of the decision to raise interest rates.
- They see that headline inflation rate is still below the target of 2%. Headline inflation is 0.5% (12 months to Nov 2015). Though core inflation which ignores fuel and food rose 2% last month)
- Given depth and length of recession, there is still lost output compared to the previous trend growth
- The world economy is still weak with prospects of falling demand from abroad.
- The US economy is already been affected by an appreciation in the dollar, making manufacturing exporters less competitive
- Given the long period of economic expansion, it is better to overshoot the inflation target than undershoot the target. If inflation rises to 4%, this will help normalise economic growth and end fears of deflation, but it is relatively easy to reduce inflation of 4%.
- However, if the Fed undershoot the inflation target and we end up with deflation – this is much more damaging. It has proved much more difficult to overcome deflation (e.g. case of Japan and increasingly the Eurozone)
Example of ex ante and ex post
And it will be quite some time before we have any evidence about whether the Fed’s judgement of the economy’s trajectory was right. (I think this was an ex ante mistake even if it turns out OK ex post, but it’s still interesting to see how it goes.) We’re talking months if not quarters, and it may take years. Fed Follies
The decision to raise interest rates is based on ex ante predictions. The Fed doesn’t know for certain how the US economy will behave. It is making a prediction that the economy is growing fast enough to justify a rate rise.
However, it will only be in one or two years, whether we will be able to tell whether the decision was correct. For example, if this interest rate, combined with the global recession, pushes the US economy back into recession, the ex ante analysis of raising rates may prove it to be the wrong decision.
What does Krugman mean when he says “I think this was an ex ante mistake even if it turns out OK ex post”
Even if the US economy is still doing well in one or two years time, with strong growth – this would suggest that the decision to raise interest rates was justified. However, Krugman feels that it is better to err on the side of caution – it is better for inflation to overshoot than undershoot. In other words, the problems of inflation above the target are not symmetrical with the problems of inflation below the target. Given current knowledge of the economy, the best ex ante decision is to hold back from raising rates.
Eurozone raising interest rates 2011
In 2011, higher oil prices caused a rise in inflation. Based on ex-ante predictions of future inflation, the ECB raised interest rates. However, inflation proved temporary and the Eurozone economy slipped back into recession. Ex post (after the fact) it appears this decision to raise interest rates was misguided because:
- There was no real underlying inflation
- The rise in interest rates was a factor in causing a recession.
- It would have been better to tolerate higher inflation (like the Bank of England did) than risk a slowdown.