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.