Home > Monetary Policy > Mr Blanchflower, Your Country Needs You

Mr Blanchflower, Your Country Needs You

Chris Giles at the FT and the peripatetic David Blanchflower, currently writing for the Independent, are probably the Bank of England’s most effective critics in the mainstream media.

Blanchflower has an excellent article from Monday damning the MPC’s behaviour:

The MPC focused on targeting inflation, expecting that would bring stability, and look what happened. Now is the time to consider switching to a dual mandate that would includes growth, which would give much needed flexibility.

What is the best way to incorporate output and inflation into a single nominal target for monetary policy?  Targeting nominal GDP.  Blanchflower continues:

I am now of the view that the Treasury would probably have done a better job setting interest rates than the MPC achieved. Between 1997 and 2007, the path of rates would have been approximately the same. Whichever of the two bodies had set rates would have been driven by market discipline.

Interest rates would probably have been higher in 2007 as the housing boom was raging and house price to earnings ratios approached unsustainable levels. Alistair Darling has made it clear he would have cut rates earlier in 2008 if it had been left to him, and there is no reason to disbelieve him. I suspect if Osborne was making the decision right now, he would – correctly in my view – have done more QE.

It’s not obvious that house prices were “unsustainable” given that UK prices have barely moved since 2007 despite the Bank allowing a massive fall in NGDP in 2008, but the last points are fantastic.

I agree completely that Osborne would be easing right now if he held the levers of monetary policy.   Cameron and Osborne paint themselves as “fiscal conservatives and monetary activists“, and Osborne was openly begging for more QE in the Autumn of 2011 before the MPC grudgingly obliged in October.

Blanchflower has also been a persistent critic of the Bank’s forecasting failures.  Nominal GDP level targeting solves this problem too, by ensuring the Bank must correct any under- or over-shooting of the level target due to forecasting error.

The UK needs a monetary revolution to escape the follies of inflation targeting.  We cannot have that revolution without more high-profile advocates for NGDP targeting.  We’ve already got Samuel Brittan, Will Hutton and Vince Cable.  Can we add David Blanchflower to that list?

Categories: Monetary Policy
  1. asdasdasd
    May 16, 2012 at 11:47

    You can add Ambrose Evans-Pritchard at the Telegraph:


    Also possibly Martin Wolf :


    Gavyn Davies, if not advocating NGP targeting, at least explaining it:


    And may be Tim Harford via twitter, (if only he would actually write a column supporting/explaining nominal GDP targeting):

    and Ryan Avent at the economist:


    What is it with being employed by Pearson and understanding macroeconomics? Weird.

    On the other hand, less impressively David Smith, economics editor of The Times, has been arguing that nominal rather than real interest rates should be used in investment decisions, a public finance econ 101 fail. I am beginning to suspect reading The Times will actually make you less informed about the economy than simply sitting in a darken room:


    Jonathan Portes was less than impressed:

    “At this point, I really don’t know whether it is because he’s dug himself into a hole and doesn’t want to admit it, or because he genuinely doesn’t understand the government’s intertemporal budget constraint – a standard identity, taught in any decent graduate macro or public finance course, if not before.”


  2. Tony Holmes
    May 16, 2012 at 12:16

    “The MPC focused on targeting inflation…” Well, isn’t that what they are supposed to do given their current mandate ? So, isn’t Blanchflower’s criticism as much a criticism of the mandate as it is of the Bank itself ?

    And if Osborne is as keen on monetary easing as you suggest, what’s to prevent him changing the Bank/ MPC’s mandate ?

    Or better still, do away with the whole charade of Central Bank Independence…

  3. May 16, 2012 at 13:21

    asdasdasd – I knew should not have attempted to write a list :) Yes, you are right of course, we do have AEP and Avent too in the UK who have been good advocates.

    Tony – yes, Blanchflower’s criticism does seem to be aimed at the mandate itself, which is great. It would take an Act of Parliament to change the Bank’s legal mandate, but HM Treasury has massive scope to change the stance of monetary policy by changing the interpretation of “price stability”, as I’ve mentioned before.


    Why doesn’t Osborne do anthing? I don’t know. Politics? Inertia? Civil servants’ small-c conservatism? Stupidity? Ignorance? Your guess is as good as mine.

  4. May 17, 2012 at 06:34


    Somewhat off a tangent, but 2007 was the peak of house prices. That they’ve barely moved since then is not proof of anything, given that prices in general have barely moved since then, sans VAT.

    Current median UK home price is ~£220k. Median income is ~£25K. If that’s not unsustainable, I don’t know what is. The only well known places that out-do UK in this regard are Beijing and the Silicon Valley, perhaps.

    On QE, it is a bit of a conceit to believe that Osborne/Cameron understand easing better than Posen, King, Bean. UK inflation is runnning around 4%, core inflation around 2%. (And as Buiter once said, the core is rotten. A country that imports so much energy should not be talking about core). BoE, whatever its official stance, is not following its inflation target. The trouble with monetary easing in the UK is 1) It’s an open, small economy. The only easing that works is a currency depreciation. 2) Almost all assets of the banking system that could be monetized have been monetized. Including, in some cases, car loans made in Australia. I kid only a little.

    What the UK could do is a quasi-fiscal helicopter drop through the PAYE system – BoE officials have hinted as much. And OMO sales of currency versus EM currencies, once energy prices come off enough. IMO, you will see UK doing both at some time or the other – only opinions about the timing and the urgency might differ.

  5. May 17, 2012 at 08:46

    Thanks for your comment Ritwik. A few notes: the CPI-CT index has certainly risen since 2007, it is not just VAT. http://timetric.com/index/uk_cpi-ct_all_items/

    On house prices: I’m not sure about your choice of data – Nationwide says £164K, and isn’t household disposable income the better measure if you want an earnings ratio? You seem to be making an argument by assertion; house prices were unsustainable in 2007 because you say they are. I haven’t looked at an international comparison of price/earnings recently, do you have a link? I seem to recall Britain was about the same as Sweden and Australia when you looked at household debt-to-income.

    On QE, this is a large discussion, I don’t have much more to add to what I’ve posted previously. You talk about whether “easing works” and note that inflation is rising 2-4% – the Bank think this is a sign that QE is “working”. If you simply mean we have a supply-side constraint, sure, this is a reasonable argument, though I’m not as pessimistic as others.

  6. May 17, 2012 at 09:50


    My house price source data is this : http://news.bbc.co.uk/1/shared/spl/hi/in_depth/uk_house_prices/html/houses.stm

    I have a feeling that the Nationwide data may be the average value of a mortgage rather than the house price itself, but maybe they’re just calculating different things. Zoopla corroborates BBC.

    I take your point about Australia, not sure about Sweden. And yes, we should be talking about median household disposable incomes, which will make it £35,000 rather than £25,000. So the ratio is 6:1, still way beyond the ‘sustainability’ limit of 4:1. Agreed, my geographical rhetoric was off, but house prices in the UK aren’t really sustainable.

    About QE and inflation, yes, we’ll just have to wait and see. King did talk about the sterling having scope for upto 25% depreciation. So it’s clear that he sees that’s the way to go for monetary easing – my guess is they’ll wait until energy prices recede a bit more.

  1. May 16, 2012 at 23:25

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