Mark Carney was poached last week to replace Mervyn King as Governor of the Bank of England. As though replacing an incompetent central banker with a competent central banker wasn’t good enough, the news just kept on getting better:
From our perspective, thresholds exhaust the guidance options available to a central bank operating under flexible inflation targeting.
If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP
I’m behind the curve a little bit on this one, but it is potentially huge news. Remember that under inflation targeting if you crash an economy but get inflation back up to a positive but low value then you’re more or less out of stimulus options. Hello lost decade. With a target for the level nominal GDP you must make up for any shortfall. Hello recovery summer.
Now, Mark Carney isn’t saying he wants to implement NGDP targeting, he isn’t even saying other people might want to implement it. He is merely saying that it is an option and central bankers need more options. The anti-Yes, Minister. “Something must be done. This is something. But there are other somethings too.” Eminently sensible and of course very central bankerese, as you would expect.
The Government is replete with figures who already find this option attractive. Giles Wilkes, much missed blogger, now my favourite coalition apparatchik (low praise indeed!), wrote the book on this from a UK perspective in 2010 in his paper “Credit Where It’s Due.” His Boss, Vince Cable is also sympathetic. Indeed, even George Osborne “said he was pleased Mr Carney was discussing such ideas.”
What makes this exciting is that implementing this policy revolution is really easy given the laws on the books in the UK.
One interesting thing about central bank independence in the UK, is that there are very few checks or balances protecting it. The Bank must aim for “price stability,” but the Chancellor can change the definition of “price stability” whenever he wants. It’s right there in the 1998 Bank Act. I thought I was the first UK blogger to cover this, but actually Britmouse got there a full two months before I picked it up. This isn’t an esoteric or obscure fact, if it’s in the FT it’s more or less in respectable discourse.
Politically, it would cement austerity as a fiscal and social policy measure, but would likely dramatically improve private sector job and productivity performance. As demand picked up underutilised resources and resources (stuff and people, basically) shed from the public sector would find it easier to find work. It is an electoral nightmare for Labour.
However, it would dramatically improve the economy’s performance, so even the anti-Tory in me agrees with Britmouse when he says “Tories Should Embrace Nominal GDP Level Targeting.” In 1931 the UK blazed a trail by abandoning the gold standard and ending the Great Depression, in 2013 maybe we will get a chance to end the Little Depression and one last moment as a great power.
In the main shamelessly cribbed from Britmouse, here are some links to things other people have written.
The BBC lower the tone by getting confused: “Mark Carney suggests targeting economic output“
Sky News Editor Ed Conway: “Why we all need to know about NGDP“
Jeremy Warner at the Daily Telegraph: “It’s time the Old Lady was given more obvious growth objectives“
Larry Elliot at the Guardian: “New Bank of England governor Mark Carney mulls end of inflation targets“
Gavyn Davies at the FT: “Carney differs from Bank of England orthodoxy“
Chris Giles and George Parker at the FT: “Treasury open to Carney radicalism“
FT Editorial: “New broom clears way for Old Lady“
Chris Giles again: “Osborne should heed Carney’s message“
Faisal Islam, Channel 4: “Carney’s recent musing on UK jobs and housing bubbles“
Dropping the Inflation Target? from Duncan Wheldon
Tories Should Embrace Nominal GDP Level Targeting from Britmouse
Monetary Policy Innovations from Simon Wren-Lewis
Mr. Osborne: “There is a lot of innovative stuff happening around the world” from Lars Christiensen
How soon is now, UK NGDP targeting edition from FT Alphaville