With Great Discretion Comes No Accountability
Simon Wren-Lewis argues that the UK monetary policy stance in 2011 would have “allowed” easier fiscal policy, and better real outcomes. If we presume that the Monetary Policy Committee are targeting the forecast, does that claim bear out?
Here is a graph of the full range of the inflation forecasts published at each Inflation Report in 2011:
In the forecast-targeting game, the MPC were not obviously failing in the first or second quarters. Indeed, the median CPI forecast in Q2 (red line) being above target all the way out gives reasonable justification for the three MPC members wanting to raise rates at the time. In a counterfactual with fiscal policy planned to be looser, presumably pushing those forecasts up higher, it would be very hard to predict the MPC response in the first half of 2011.
Yet Wren-Lewis makes a stronger claim:
So, if the MPC had raised interest rates in 2011, they would have been wrong to do so. That is obviously true in hindsight
This does not seem at all obvious to me if you endorse inflation targeting, forecast-targeting. Wren-Lewis appeals only to the discretion of the MPC in judging the appropriate stance for monetary policy, advising some kind of cost/benefit analysis based on the size of the “output gap”.
This is the whole argument? UK macro policy is based on the hope that we can find benevolent MPC members who will exercise their discretion wisely?
How well has that turned out since 2008? How will we hold them accountable for exercising discretion? What is the benchmark? CPI? An abject failure; four years above target. The CPI forecast? Unstable since 2008. Deviation of nominal GDP from trend growth? Disastrous failure. Likewise for Real GDP? Failure. Unemployment? Failure, failure, failure. It is failure all the way down; so let’s hand out a knighthood.
Wren-Lewis has another answer. We need not hold the MPC accountable at all, because we can find always find an appropriate bogeyman for macro policy failure – politicians:
But the real source of the [2010/11 macro policy] error is to be found much earlier, when the Conservatives opposed the government’s fiscal stimulus measures in 2008/9
The disaster of 2008 shows exactly what can happen when monetary policy-makers exercise their discretion and decide to burst a commodity price bubble. Are we doomed to repeat this experience? No, no, no.
Yet it is hard to see how the debate in the UK will move beyond a discussion of fiscal policy when the economics profession is so blinkered. The BBC Today programme’s Evan Davis – an ex-IFS economist, no less – hosted a discussion of UK “austerity” recently. What mention of the failings of UK monetary policy? Zero, zilch, nada.