Home > Bank of England, Monetary Policy > Kate Barker: Je Ne Regrette Rien

Kate Barker: Je Ne Regrette Rien

Ex-MPC member Kate Barker has written a paper on UK macro policy for CentreForum, which I found to be thoroughly disappointing, though there is at least a discussion of NGDP targeting.

The only criticism she can find for UK monetary policy is that the MPC failed to tighten policy earlier, and prick the developing credit boom.

Policy content is arguably more important than institutions, however. As far as monetary policy is concerned, it is curious that no reform at all has been suggested. The failure of the MPC, of which I was then a member, to appreciate the financial problems building up in the economy and take any pre-emptive policy actions points to the conclusion that the two year horizon for bringing inflation back to target can distract the MPC from looking hard at longer-term underlying imbalances in the economy.

This is an utterly ludicrous analysis.  The MPC have persistently failed to set policy such as to hit the 2% target on a two year horizon since 2008.  Their failure to do so has been associated with one of the worst demand management disasters in UK history.  And Ms Barker’s policy recommendation is that they should concentrate less on the two year horizon and more on the “longer-term underlying imbalances”.  Maybe what we really need is someone running the Bank who has an obsession about “longer-term underlying imbalances” and cares little for actually setting good Svenssonian monetary policy.  OH WAIT.

The specific change to the Bank’s mandate which Ms Barker desires is as follows:

In addition to taking a longer-term view of risks to inflation, a more strategic approach to monetary policy would also be enabled if the point CPI inflation target were changed to a range, perhaps of 1-3%. In present circumstances, the MPC declaring its intention to aim towards the top of that range would reassure that there will not be a premature tightening of policy as the economy recovers.

This made me scream at my computer.  What was Ms Barker doing in all those MPC meetings?  She thinks they need more discretion?   Like in February 2009, when the Bank had set policy such that they expected to achieve a CPI rate of just 0.4% looking two years out?

Again we see this assumption that the Bank are “happy inflationists”, who really want to “aim towards the top of the range”.  If that were true, why have the Bank set policy which they’ve expected to produce  an inflation rate of just 1.5% on average since 2008, on the two year horizon?  The assumption is patently false.

That this document includes a commendable discussion of democratic accountability when delegating macro policy to technocratic bodies is a final insult.   The MPC have spoken, and they have declared: the MPC are blameless!

  1. asdasdasd
    August 23, 2012 at 18:35

    Maybe a little harsh?

    At least she recognises that maybe the 2% inflation target wasn’t the hottest idea a macroeconomist ever had.

    And I thought you wanted to persuade UK macro-economists to call for further changes to the inflation target?

    She doesn’t say that the MPC are blameless:

    “There should also be realism about what economic policy can achieve. However good the policy institutions, and however intelligent and wise the policymakers, from time to time events will provoke unexpected changes in the economic environment such that predictions will be proved wrong, and decisions found wanting. Even with hindsight it is not easy to distinguish policy error from a decision which proved incorrect in the light of subsequent unforeseen events. Looking back as an ex-policymaker, the long upswing which culminated in the financial crisis prompted too much being expected of us, and sadly too much self-confidence surrounding our deliberations.”

    In this she’s right, I doubt that any one else would have consistently made better decisions with a 2% headline CPI target.

    This is exactly why the UK needs a monetary policy framework that works despite policy makers’ and economists’ failings. This is Sumners’ point about aiming for the the destination rather than worrying about the speed. If you hit a bump, or swerve a bit when targeting NGDP, it’s ok as long as you can, and are expected to compensate in future.

    She provides no convincing arguments against NGDP targeting. She doesn’t acknowledge that an advantage of NGDP targeting is that you don’t need to know what is happening to productivity.

    She also states “there is a risk with full nominal GDP targeting that inflation expectations are dislodged too far”. I don’t know of any research that shows this to be the case, she cites no empirical or theoretical evidence to support her statement.

    Her statements about forward guidance are similarly lacking in evidence or convincing arguments to support her case. Her statements about the press is particularly telling:

    “and from a change of view from a pre-published path attracting more unwelcome commentary about the Bank being wrong.”

    Anyone conducting public policy should really take it as a badge of honour that the press says nasty things about them. Particularly when print things and ask questions as stupid as “well your predictions were wrong”.

    Surely it’s a start? At least she’s talking about changing the target.

    • August 23, 2012 at 19:54

      Too harsh? Moi? Maybe! :) I agree with much of what you say.

      A lack of recognition that the MPC already exercise discretion over the target rate at 2 years seems dangerously ignorant for somebody presenting an analysis of the MPC’s record in recent history. I’m just tired of all the excuses for the MPC, I guess. They always seem above criticism. Bernanke’s Fed is getting caned by many US macro commentators and their macro policy is a better than ours. And David Blanchflower is an existence proof, that it was possible to call for better (looser) policy most of the way through 2008, even under the 2% target.

  2. August 23, 2012 at 21:31

    Maybe getting folk to move to NGDP targeting is too much of a leap in the dark for them. Maybe we can just get folk to change the time-horizon of the inflation target, using Australia as a positive example.

    • August 23, 2012 at 22:15

      Hi Lorenzo, I sadly know little about the practice of IT in Oz. Do you have a post on that or a good reference? Do they shift the target to account for output gaps, Svensson-style, or anything similar? Or is the concept of an output gap ancient history down under?

      • August 25, 2012 at 01:38

        21 years without a recession does reduce the salience of any output gap. The target does not shift, but because it is an average over the business cycle, policy signals about both inflation and output; easing indicates they are worried about output, tightening that they are worried about inflation. The RBA website is informative.
        In the RBA’s own words:
        The inflation target is also, necessarily, forward-looking. This approach allows a role for monetary policy in dampening the fluctuations in output over the course of the cycle. When aggregate demand in the economy is weak, for example, inflationary pressures are likely to be diminishing and monetary policy can be eased, which will give a short-term stimulus to economic activity.

  3. asdasdasd
    August 23, 2012 at 21:32

    I know, and I very much share your frustrations with how slowly the MPC has adapted to the situation over the last four years, and how poorly they’ve communicated their aims and objectives. For example, your criticism about Mervyn King emphasising uncertainty, rather than focusing on increasing certainty about what the MPC will to reduce uncertainty, was bang on the money, and the way the MPC has lost the public debate over QE to quacks and charlatans like Altmann David Smith of the Times is shocking.

    But, if the inflation target is going to be changed, (I think you are right, a change could help), people like Barker have the authority to affect it. I think she’s more likely to be persuaded by respectful but persistent pointed questioning than by focusing on past mistakes and apportioning blame.

    Consider Tim Besley, he’s the second most cited economist in the UK and former member of the MPC. Whilst on the MPC, he got important calls wrong. So I don’t think the problem is due to insufficiently able members of the MPC. I don’t think that fact that Blanchflower got those calls right suggests this either. It’s the institutional arrangements that are the problem because they require “perfect” policy makers, when even the best will be fallible. So put yourself in Besley’s position, does seeing Barker get an screen full of criticism after contributing to the debate, increase or decrease the likelihood that Besley would contribute anything?

    Yet it’s people like Barker, Besley, van Reenen, Wren-Lewis, Portes, Weale and Chote who will need to be convinced, and it’s they who will need to persuade politicians, if the inflation target is to be changed.

    So when people stick their head above the parapet, surely we should applaud and encourage?

    • August 23, 2012 at 22:01

      Point taken asd, you’re right.

  4. August 28, 2012 at 12:52

    Thanks for the pointer to the Kate Barker paper, it was a useful example of the significance of a certain sort of mindset, which I described (in a post you might like) as the view that expectations about prices matter, and are a matter for monetary policy, but expectations about spending do not or are not still has a depressing hold on perceptions.
    The post is here:

    Also, my comment above may have been a little bit too cryptic. What I was trying to say, is that RBA interest rate policy changes send signals about both inflation and output.

    • August 28, 2012 at 13:08

      Fantastic and educational post, thanks Lorenzo! You could not be more right about expectations vs prices and spending.

  1. August 28, 2012 at 13:02

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