Regime change at the Bank of England?

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


Is Osborne being squeezed from all sides?

Vincent Cable. Photograph: David Levene

The FT reports that “cabinet ministers”  – it’s Vince Cable, everybody knows it’s Vince! – are looking into completely nationalising RBS and setting it to work directly lending to firms in an effort to boost growth. It would cost £5bn to buy the remainder of RBS and the betting I expect is that this would be paid for several times over if the purchase leads to even a modest increase in growth. Yet, this is the same Vince Cable who asked “What tools does the Government have?” and responded:

The first is continued use of monetary policy, and stronger communication of the policy aim it is meant to achieve – robust recovery in money spending and GDP.

This is what has confused me. Taking over RBS seems to be a losing proposition because were RBS – or the newly formed national investment bank – to boost lending it would eventually lead to firms expanding production and hitting bottle necks. Those bottle necks would cause price increase and those price increases would lead to tightening from the Bank of England. The action would be entirely self defeating.

There seems to be only a couple of ways to explain Vince’s economic policy in view of his previous comments. One is that there is a supply side problem in the banking system. The banking system is currently in a stable equilibrium where no banks are lending much and it doesn’t make commercial sense for any bank to break ranks because unless others join and encourage growth it will fail. The government is there to overcome this and move the banking industry to a high lending equilibrium. Overcoming this problem would actually lend a deflationary pressure to the economy by improving productivity and encourage more stimulus from the Bank of England.

The second justification for Vince’s policy is that no longer doesn’t believe that changing the Bank of England’s mandate to target nominal GDP is enough. Given Vince’s past comments I don’t think either explanation for this policy is really convincing. Vince has always emphasised the Chuck Norris effects of a NGDP target for the Bank: communication is the tool, not the banking channel. I then got reminiscing and thought…where had I heard of combining a nominal GDP target with directed lending to firms…why its good-egg of the liberal blogosphere and coalition apparatchik Giles Wilkes’  Centre Forum paper “Credit Where it’s Due” of course!

It looks like what is being discussed is the second plank of Giles’ prefer policy:

The Bank should start by targeting a high level of nominal growth until the economy is performing at its potential. This will reassure the private sector that liquidity won’t dry up in the near future, and so encourage more investment now. The second step should be for ‘credit easing’ to replace ‘quantitative easing’.

But why start with the second, less potent policy? Politics.

Then it occurred to me. George Osborne is facing as much pressure  to change course from within the Cabinet as from without.

It looks like a rearguard action is being fought within the Government to upset Osborne’s deficit cutting and investment cutting first policy platform. This is unsurprising, the coalition is presided over a lost decade in progress and that does terrible things for your reelection chances, especially for the Lib Dems.

As I’ve pointed, ad nauseum, the Chancellor can change the Bank of England’s mandate to adopt NGDP level targeting at any time, but there are political risks to doing anything unconventional and Osborne seems loathe to deviate from the script. Osborne is very much a part-time Chancellor but he is a full-time political operator.

Perhaps there is a worry in Government that changing the Bank mandate alone will be insufficiently convincing for firms and markets, it may be that this policy is a supporting plank of one that will be much more effective. And perhaps, more importantly, there is a worry in parts of government that they will not be able to convince another part of government change the Bank’s mandate unless the groundwork has been laid to make it politically acceptable.

So although the nationalisation of RBS may prove good policy in the end, it may be that its political power is more important than its economic significance. Although it doesn’t strike me as necessarily the best way run a bank, given that we’re already screwed and convincing expansionary monetary policy is our only hope, I’ll see how this one plays out.

Vince Cable is still the best member of this Government

Lars and Britmouse got there first, but let me point you towards Vince Cable‘s recent speech. The mainstream media focused on Vince’s reference to homebuilding in the 1930s. That is understandable in a country as obsessed with housing as the UK is, but the really interesting part was on monetary policy.

As in the 1930s, homebuilding now would be a sideshow, the real impetus to growth in the 1930s was leaving the gold standard, devaluation and reflation. This is exactly the policies  I and others have been calling for. Homebuilding was a consequence, not a cause of the UK’s recovery.

Without the Bank of England supporting the government no policy effort will be successful and this is what Vince says. Furthermore, without communicating that clearly the policy will fail. This is exactly what people like Scott Sumner and David Beckworth have been saying…and know it finds itself in the mouth of Vince Cable:

The right way to understand loose monetary policy is in terms of expectations: of whether future money demand will be growing fast enough to make borrowing to invest or spend worthwhile.  It is not enough just to look at the base rate.  Look at Japan: because of its persistent deflation, its zero-interest rates still do not reflect easy money conditions.  Anyone investing is facing the persistent pressure of falling prices and falling profits.

In the 1930s, the abrupt departure from Gold – so much condemned by the City – had the strongest possible effect on expectations of rising money GDP.

…What tools does the Government have? The first is continued use of monetary policy, and stronger communication of the policy aim it is meant to achieve – robust recovery in money spending and GDP. The Mansion House speeches signalled a clear intention to continue aggressive monetary policy.

Ladies and Gentlemen, that is Vince Cable advocating a NGDP target as a commitment device, exactly what this blog and many others have been arguing is essential if the UK is ever going to recover. There is some hope.

The Markets Don’t Predict a Bright Future

Loathe as I am to piddle on Scott’s victory parade, I think some perspective is needed. NGDP targeting is catching on, it certainly has supporters within the UK Government like Vince Cable and his staff and in the commenteriat. Likewise, it is gaining ground with Jeffrey Frankel, A professor at Harvard and in Japan and with Paul Krugman and yada yada yada…things are looking up for this obscure policy, which is a good thing.

Yet this optimism doesn’t appear to be buoying markets. If NGDP targeting has been gaining popularity you’d like to see some sign of it in the stock markets, yet the last three months have been awful.

There’s an awful lot of red pixels. Of course inferring anything from market data is very difficult, that is after all the point of markets, to process information. Events in the real world of central banking are likely to dominate discussions of NGDP targeting. But, were monetary policy regime change to be likely you would expect to see some optimism in the numbers, and these are very pessimistic numbers indeed.

Scott should be happy with his progress so far, he has undoubtedly helped put NGDP targeting and monetary easing back onto the policy agenda, when it might have been ignored. However, he is premature in saying the future is bright when all signs suggest it is very likely quite dim.

Its catching…

One down, eleven to go

From Matt O’Brien at The Atlantic:

Chicago Federal Reserve president Charles Evans doesn’t look the part of a heretic. But in the cozy, conservative club that is central banking, he certainly qualifies. While most of his colleagues at the Fed have recently taken an even more hawkish turn, Evans remains a champion of additional monetary stimulus. And on Tuesday he took an even bigger step: He became the first sitting Fed member to endorse nominal GDP (NGDP) level targeting.

.   .   .


The Fed is still a long way off, if ever, from adopting an NGDP level target. But Evans’ endorsement of the idea is a big first step in what could be a hugely important paradigm shift. Even if there isn’t a large difference between the quasi-NGDP level target that is the Evans Rule and an actual NGDP level target, it’s a fairly radical new way of framing policy. Rather than the central bank letting the economy recover faster, it puts the onus for a faster recovery on the central bank.

Most incredible is how quickly the idea is gaining acceptance. It’s true that writers like The Atlantic’s own Clive Crook have long advocated the merits of NGDP targeting. But as recently as 2009, it was mostly just a few lonely bloggers like Scott Sumner and David Beckworth who picked up the torch. Then Goldman Sachs chief economist Jan Hatzius and Paul Krugman said they were willing to give it a try. Now, a sitting Fed president is on board.

At this rate, it might not be long until we describe Evans as an orthodox central banker. Now that would be progress.

That is one of the US’s top central bankers supporting NGDP level targeting as endorsed on this blog. Hopefully a UK central banker will make the leap soon too, senior figures inthe