Home > Monetary Policy > Blanchflower Sticks the Knife In

Blanchflower Sticks the Knife In

A quick note.  David Blanchflower has another excellent article at the Indy today, noting the incomprehensible MPC decision to cease QEasing this month, and adding his voice to those calling for a change to the inflation target:

Targeting inflation hasn’t delivered the promised economic stability, far from it. It is now time for a change. In a new book*, Olivier Blanchard, chief economist at the IMF, puts it well: “Before the economic crisis began in 2008, policymakers had converged on a beautiful construction for monetary policy. We convinced ourselves that there was one target, inflation, and one instrument, the policy [interest] rate. And that was basically enough to get things done. One lesson to be drawn from this crisis is that this construction was not right: beauty is not always synonymous with truth. There are many targets and many instruments … Future monetary policy is likely to be much messier”.

Messy indeed. There have been calls for the MPC to target nominal demand, but I just don’t think that is practical given the frequent data revisions that occur. A simple change, which amounts to much the same thing, would be to first raise the inflation target to 4 per cent. This could be done next year when the CPI changes to include house prices based on rental equivalence. Second, the mandate should be extended to become dual and explicitly include “maximum employment” as of the Fed, which is tasked with maintaining “maximum employment, stable prices, and moderate long-term interest rates”.

Simon Wren-Lewis had also written last week that “Inflation targeting is not working“.  Excellent progress!  And still some work to be done on the practicalities of NGDP targeting.

Categories: Monetary Policy
  1. asdasdasd
    May 21, 2012 at 21:40

    Some progress, Blanchflower doesn’t seem completely persuaded by NGDP targeting.

    Have you read some posts on the reviews of the Bank of England’s performance since the crisis?

    One of the three reviews will investigate why the Bank of England has been so poor at forecasting inflation, one will look at its role in the bank bailouts, .

    But none of them will explicitly investigate whether 2% headline CPI is the most appropriate target for monetary policy.

    This seems crazy to me, the bank is getting slaughtered in the press, largely because it’s failing to hit an inappropriate target. Surely they should take this as opportunity to debate alternatives to the inflation target?

    • May 22, 2012 at 07:19

      asdasdasd, I agree. The reviews sound pointless. We will get another boat load of posturing by the hawks about how the BoE was wrong to do QE.

      The Bank seem to use criticism as a way to grab more power. They failed because they didn’t have powers to whack bankers. Just give them more powers, MORE discretion over the economy, and everything will work out fine.

      • asdasdasd
        May 22, 2012 at 08:24

        I suppose it depends on the details, if the reviews are conducted behind close doors, and ask the wrong questions, as appears to be the case, then yes pointless.

        But that’s unfortunate, an open review or select committee could provide a platform for a more informed debate on monetary policy, and in particular what parameter central banks should target.

        It’s hard to see the flexible inflation targeting winning that debate.

        On Blanchflower:

        “There have been calls for the MPC to target nominal demand, but I just don’t think that is practical given the frequent data revisions that occur. A simple change, which amounts to much the same thing, would be to first raise the inflation target to 4 per cent. ”

        This is a pretty weak argument against targeting NGDP. One of its most appealing features is the expectation that central banks will correct for their forecasting errors in future. This is not the case for a 4% inflation target. Furthermore, a 4% inflation target appears politically impossible.

        Maybe you need to explain the benefits of targeting NGDP to him more slowly?

  2. May 21, 2012 at 23:31

    4% inflation might be a good idea, it should make it easy to hit the implicit 7% NGDP target because rates will so infrequently hit zero. A la Australia.

    Still, I don’t think it is an easy sell politically. “Stable nominal income growth” etc. sounds better than “stuff getting more expensive more quickly.”

  3. May 21, 2012 at 23:32

    Incidentally, I know one of the things Krugman calls for in his new book is a 4% inflation target, rather than a NGDP target, so I’m looking forward to reading that when it arrives.

    • May 22, 2012 at 07:30

      Yeah, Krugman has called for 4% for a while, no surprise why Blanchflower picked that particular number.

      I guess it would help. But the problem in 2008/9 was not the zero bound, it was CPI going 2-3% above target at the same time as we had a demand shock.

      The politics of changing the target fill me with dread. It would be seen as a failure of “plan A” for the Coalition to do it, and as Labour have tied themselves so tightly to the good ship “fiscal stimulus” it would look bizarre for them to do, should they win in 2015.

  4. May 22, 2012 at 07:34

    Actually if there is a major disaster, e.g. Europe goes down, I can see that target change could become politically acceptable. Shock Doctrine!

  5. Bill le Breton
    May 22, 2012 at 17:19

    DB’s concerns over the ‘the frequent data revisions that occur’ are why Sumner recommends that the Bank of England sets up a NGDP futures market and subsidizes trading of NGDP futures contracts.

    NGDP targeting has gained some ground, but needs now to explain to the ‘yes, buts’ how such a futures market could work and how it would remove their concerns.

  6. May 22, 2012 at 17:47

    Bill, yes. A problem is that the ONS calculate some of NGDP from volume data and deflators which they pick out of the air. The Blue Book 2011 was a case in point; they revised NGDP data going back a long way merely by changing the formula used for the deflators.

    • Bill le Breton
      May 22, 2012 at 18:01

      a job for britmouse

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