George Osborne, Market Monetarist?
George Osborne continues down the path which can only be concluded by getting the phrase “I ♥ Scott Sumner” tattooed onto his forehead (or maybe somewhere more private?):
Theory and evidence suggest that tight fiscal policy and loose monetary policy is the right macroeconomic mix to help rebalance an economy in the state I’ve just described.
Of course, there are those who argue we should not be reducing the deficit – we should be spending and borrowing even more.
But that argument ignores a crucial fact: inflation in the UK has been significantly above the Bank of England’s 2% target since the end of 2009.
That is due to a combination of commodity price shocks, the lagged effects of a lower exchange rate and a worsening underlying productivity performance, and it has very important implications for fiscal policy.
Looking backwards it means that over this period looser fiscal policy would almost certainly have been offset by tighter, or less loose, monetary policy.
The fiscal multiplier is already likely to be low in an economy as open as the UK; an offsetting impact from tighter monetary policy would make it lower still.
In other words, much if not all of any gain from more deficit-financed spending would have been lost through higher imports and tighter monetary conditions.
Looking forwards, it is very hard to argue that monetary policy – in all its forms – has run out of road.
My emphasis. Now change the target, George.