All that Matters is Nominal GDP, Gilt Market Edition
I should have put this in my previous post. Martin Weale professed his concern for gilt yields:
But if we were to have faster inflation in the way you describe we would be hearing quite a lot from people on fixed incomes and we would probably also see the market drive up yields on government debt which could be something that would pose a burden for the taxpayer even if inflation did eventually come down.
Scott Sumner addressed this specific point in his post on Charles Goodhart:
[...] Goodhart is assuming debt markets care about inflation. They don’t. They care about NGDP growth. As long as NGDP growth is around 4%, long term nominal rates will remain relatively low. That’s the case regardless of whether the 4% NGDP growth is associated with o% RGDP growth and 4% inflation, 2% RGDP growth and 2% inflation, or 4% RGDP growth and 0% inflation.
The point about bond yields following NGDP not inflation seems reasonably clear in the data. Here’s the chart for the UK:
UK Nominal GDP and Inflation vs Gilt Yields
