Argentina’s legendary footballer Diego Maradona led his country to victory in the 1986 World Cup, beating West Germany in the final. However, the crowning moment of his career came earlier in the tournament, beating England 2-1 in the quarter-finals. Maradona scored both of Argentina’s goals, and each of them were iconic for different reasons.
The first was the infamous “Hand of God,” when Maradona rose to challenge the ball with English goalkeeper Peter Shilton and craftily (and illegally) punched it over his opponent and into the net. The referee did not see the infraction and the goal was allowed to stand. After the match, Maradona said that the goal was scored “a little with his head, and a little with the hand of God.” Much of the English tabloid press is still smarting from this incident, 34 years later.
Maradona’s second goal, however, was a masterpiece dubbed “the goal of the century.” In a 60-yard dribble, starting from within his own half of the pitch, Maradona slalomed past five English defenders before rounding the goalkeeper and scoring. Even the most sour of England fans could only applaud.
But this iconic moment in sporting history took on an unlikely importance in monetary theory, ironically thanks to an English economist.
In 2005, Lord Mervyn King, the Governor of the Bank of England between 2003 and 2013, used Maradona’s performance as a metaphor for the behavior of central banks around the world.
“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?” Lord King asked. “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.”
“The real influence of monetary policy is less the effect of any individual monthly decision on interest rates, and more the ability of the framework of policy to condition inflation expectations.”
“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 added.
While perhaps being a reductive description of Maradona’s legendary goal — in which the Argentinian forward did a lot of things, “running in a straight line” not being one of them — Lord King’s words have served as an astute analogy to the way central banks can function.
The “Maradona Method” put to the test
The Central American nation of Costa Rica has a small, highly-dollarized economy. In 2006, it started a transition from a crawling peg system (when central banks establish a band of rates in which a fixed exchange rate currency is allowed to fluctuate) to its current floating system — and that road was not without its pitfalls.
In 2017, the country was riddled by one of its worst currency crashes, with the Costa Rican Colón rapidly losing value. In January of that year, the country’s foreign exchange rate sat at USD 1 : CRC 556 — but jumped to almost CRC 600 in just four months.
But the Costa Rican Central Bank had little room to maneuver with monetary policy. Instead, it decided to approach the crisis by using the “Maradona Method,” that is, a tactic of managing expectations, without implementing specific, immediate action.
Then-Central Bank Chairman Oliver Castro announced an additional 1-percentage-point bump in the country’s Monetary Policy Rate (MPR) to stimulate savings in CRC, as well as a USD 1 billion intervention to heat up the markets. Mr. Castro, however, never gave any details about where the money would be applied.
But the mere announcement was enough to boost the local market and investors, resulting in a rally of the CRC, which returned to pre-crisis rates.
Thomaz Sarquis, an economist at brokerage Eleven Finance, says Lord King’s analogy is “brilliant” to describe central banks’ management of market expectations. But adds that, just like not every footballer could replicate Maradona’s glorious goal in 1986, not all monetary authorities can successfully play with investor confidence.
“Without credibility, no actor can manage expectations.”