Chuck Norris in Threadneedle Street
Market Monetarists Lars Christensen and Nick Rowe like to talk about invoking the Chuck Norris effect. In Nick’s words:
Central banks run monetary policy not so much by doing things, but by threatening to do things. If their threats are credible, we never observe them carrying out those threats, and we often observe them doing the exact opposite
But does the Bank of England believe in the power of Chuck? There is a hint they still do, but we have to go back to 2009.
The March 2009 minutes of the Monetary Policy Committee are a fascinating read. The MPC faced for the first time the horrific scale of the collapse in nominal GDP growth:
12. UK nominal GDP had fallen by 0.8% in 2008 Q4, and was only 0.5% higher than its level a year earlier. If unrevised, this would be the weakest four-quarter growth in nominal output since quarterly data began in 1956.
What is the response? They focus entirely on boosting nominal GDP by buying assets (mostly gilts) – confirming explicitly that influence over the level of NGDP comes ultimately from their control over the Sterling monetary base, not merely their ability to set (short-term nominal) interest rates:
30. The Committee agreed that such [asset] purchases were necessary in order to increase nominal spending growth to a rate consistent with meeting the inflation target in the medium term. Such operations were a natural extension of the Committee’s usual monetary policy operations. Given the Bank’s role as monopoly supplier of sterling central bank money, the Committee had previously chosen to influence the amount of nominal spending in the economy by varying the price at which it supplied central bank money in exchange for assets held by the private sector. Under the operations now under consideration, the Committee would instead be focusing more directly on the quantity of money it supplied in exchange for assets held by the private sector.
Then follows a lengthy discussion on the magnitude of asset purchases necessary to boost NGDP:
33. There was a high degree of uncertainty over the appropriate scale of purchases necessary to keep inflation at target in the medium term. The Committee noted that their February Inflation Report projections suggested that a significant shortfall in nominal GDP was possible over the forecast period. Nominal GDP had grown by, on average, around 5% since the inception of the MPC – a period over which inflation had been close to the target on average. In contrast the Committee’s February projections implied a small decline in nominal GDP in 2009, with growth remaining below 5% in 2010. Therefore the projections suggested a shortfall in nominal GDP of at least 5%.
This looks like NGDP growth rate targeting rather than the level targeting preferred by the Market Monetarists; the MPC are ignoring the lack of annual NGDP growth over 2008/9, allowing “base drift”.
The decision is to buy assets of a value equal to the expected shortfall in NGDP:
35. These considerations suggested that the increase in the level of money balances should be of a similar magnitude to the required increase in nominal GDP. The Committee agreed that reserves should initially be increased by a figure somewhere in the range of £50 billion to £100 billion.
But after losing the use of their usual toy, Bank Rate, they are flying blind, and incredibly, concerns about doing “too much” remain.
Finally, here comes a little bit of Chuck:
38. In addition, should the first injection prove too small, there was a risk that observers would wrongly infer that such asset purchases were not an effective policy tool. That might dampen the extent to which liquidity premia were reduced, and asset prices boosted, by further purchases. The initial programme of asset purchases needed to be on a scale large enough to demonstrate that the Committee would do whatever was needed to boost nominal spending sufficiently to keep inflation at target in the medium term.
That’s more like it! There’s your credible threat – “we’ll hit the inflation target, come what may”, and they are ready to beat up as many people as they need to get there – they will “do whatever was needed.”
- Who could read that wording, and believe that the Bank of England is likely to waver in its defence of the inflation target if fiscal policy is tightened “too far, too fast“?
- The level of the UK CPI rose 11% between February 2009 and February 2012, an annualized growth rate of 3.6%, well above the 2% target.
- It’s just a tragic shame the CPI rate was the wrong target.