Kate Barker: Je Ne Regrette Rien
The only criticism she can find for UK monetary policy is that the MPC failed to tighten policy earlier, and prick the developing credit boom.
Policy content is arguably more important than institutions, however. As far as monetary policy is concerned, it is curious that no reform at all has been suggested. The failure of the MPC, of which I was then a member, to appreciate the financial problems building up in the economy and take any pre-emptive policy actions points to the conclusion that the two year horizon for bringing inflation back to target can distract the MPC from looking hard at longer-term underlying imbalances in the economy.
This is an utterly ludicrous analysis. The MPC have persistently failed to set policy such as to hit the 2% target on a two year horizon since 2008. Their failure to do so has been associated with one of the worst demand management disasters in UK history. And Ms Barker’s policy recommendation is that they should concentrate less on the two year horizon and more on the “longer-term underlying imbalances”. Maybe what we really need is someone running the Bank who has an obsession about “longer-term underlying imbalances” and cares little for actually setting good Svenssonian monetary policy. OH WAIT.
The specific change to the Bank’s mandate which Ms Barker desires is as follows:
In addition to taking a longer-term view of risks to inflation, a more strategic approach to monetary policy would also be enabled if the point CPI inflation target were changed to a range, perhaps of 1-3%. In present circumstances, the MPC declaring its intention to aim towards the top of that range would reassure that there will not be a premature tightening of policy as the economy recovers.
This made me scream at my computer. What was Ms Barker doing in all those MPC meetings? She thinks they need more discretion? Like in February 2009, when the Bank had set policy such that they expected to achieve a CPI rate of just 0.4% looking two years out?
Again we see this assumption that the Bank are “happy inflationists”, who really want to “aim towards the top of the range”. If that were true, why have the Bank set policy which they’ve expected to produce an inflation rate of just 1.5% on average since 2008, on the two year horizon? The assumption is patently false.
That this document includes a commendable discussion of democratic accountability when delegating macro policy to technocratic bodies is a final insult. The MPC have spoken, and they have declared: the MPC are blameless!