Home > Monetary Policy > Larry Elliott on HM Treasury and NGDP Targeting

Larry Elliott on HM Treasury and NGDP Targeting

The Guardian’s economics editor, Larry Elliott, produced an interesting column over the weekend, “Why George Osborne believes everything is going to plan“, which ends with a discussion of nominal GDP targeting.

Assumption No5, therefore, is that the Bank of England will do the heavy lifting when it comes to stimulating the economy. Even though Threadneedle Street has already bought up a third of UK gilts (government bonds) through its quantitative easing programme, Osborne does not think monetary policy is now “pushing on a piece of string”. The mix of policy will continue to be fiscal conservatism and monetary activism, which raises the question of whether the Treasury will grant the Bank powers to buy up a wider range of assets, including corporate bonds.

Sir Mervyn King has always said that this is a political decision since it would involve deciding which companies should benefit from actions designed to drive down borrowing costs, but that if Osborne wants to sanction such a move the Bank would act as the Treasury’s agent.

Would the chancellor be prepared to take this step? Well, attention is being paid to the debate raging in the economics profession about the merits of replacing inflation targets with nominal GDP targets. This sounds esoteric but actually has big implications for the conduct of monetary policy, with its supporters saying it provides a way of recovering the output lost since the start of the crisis and its opponents warning that it will lead to inflation raging unchecked.

That choice of words in the last paragraph is very specific, “attention is being paid”, in the passive voice.  Surely, that can only be journalist-code for “I happen to know the Treasury is paying attention but they won’t put it on the record”?  We have already heard noise from the top of the Coalition (particularly recently) about needing loose monetary policy to offset tight fiscal policy, but there has been nothing public from the Treasury about NGDP targeting.  Even if this is only a trial balloon, it would be encouraging to know that the Treasury is at least thinking about it.

Elliott’s analysis seems plausible.  Osborne is supposed to be the “master tactician” of the Tory party, his every move calculated to secure a majority in 2015.  Right now that looks like a pipe dream.  A robust economic recovery without being seen to accept the necessity for a “Plan B” is the only way forward for Osborne, and NGDP targeting is the obvious answer.  (Lars Svensson’s Foolproof Way would work fine too, but that is perhaps politically even harder since it invokes the false image of “competitive devaluation”).

I am left wondering:

a) Can it really be true?

b) How could Osborne achieve a switch to an NGDP target without making it obvious “Plan A” has failed?

c) What could be the method of introducing the target?

For (a), maybe (and most probably) I am over-analysing with a large dollop of wishful thinking.  Why would the Treasury be dropping hints to Larry Elliot at the Guardian in particular?  Elliott is hardly Osborne’s strongest supporter.

For (b), an “event” from Europe could give an “excuse” for a major policy change.  But waiting for such an event would be unwise, since it might never happen.  Waiting for the new Bank Governor after Mervyn King’s term expires in 2013 may be too late.  So can Osborne switch course without appearing to switch course?  Any bright ideas?  Maybe he’ll just rely on voters having short memories and/or the “blame Gordon Brown” strategy.

For (c), as Left Outside has shown [edit: fixed link], the Treasury already has the legal flexibility to introduce an NGDP target by clarifying the definition of “price stability” which the Bank of England must follow.  If the Treasury intends to allow the Bank much wider flexibility over the range of assets it can buy, that could be done at the same time, or even used as motivation for the change.  “Buy whatever you like to keep NGDP rising at a 5% rate”.

Vince Cable, and now, possibly, HM Treasury.  Are we inching towards a UK NGDP target?  I’m cautiously optimistic.

Categories: Monetary Policy
  1. August 28, 2012 at 22:39

    I’d be surprised were it not discussed in the Treasury. Remember that they are taking several steps designed to make more monetary stimulus as effective as possible, and reduce the political costs of switching to NGDP targeting.

    Osborne wants to win, he can see the writing on the wall if the economy performs as well as the BoE predicts. I’ll look forward to the recovery if he does change tact, but I shan’t enjoy uprating my opinion of him.

    PS the link to my blog in your penultimate paragraph is wrong. I could use the traffic while on this blogging hiatus ;)

    • August 28, 2012 at 23:17

      Yeah, I guess I saw the Treasury split between professionals suffering from supply-side pessimism/defeatism much like the Bank, and Osborne & other politicians who don’t know better. Maybe this nudge to the Guardian really comes from Vince via LibDems in the Treasury, i.e. Danny Alexander? That would make perfect sense.

    • August 28, 2012 at 23:17

      Oh and I fixed the link. :)

  2. August 29, 2012 at 11:23

    Moving to NGDP targeting can be sold as “this is the embodiment of what we always defended. We tried to work within the framework that we inherited from the Labour governments, but we are now pursuing the policies we always defended.”

    Besides, nothing succeeds like success.

    • August 29, 2012 at 12:19

      Hah. You are probably right there. And a return to monetarism for the Tories would indeed be more like the policies they used to defend!

  3. Tony Holmes
    August 29, 2012 at 12:10

    Does the Labour Party have a view on NGDP targeting ? Or is it too much to expect them to have a publicly-stated view nearly three years away from an election ?

    • August 29, 2012 at 13:27

      Tony, I’ve not heard anything on NGDP targeting from any Labour MPs. That is not to say there is no support from the left, of course. Labour never lost an election when the BoE was providing a stable path for NGDP, so they should support it! Then again, Brown/Balls were the architects of BoE independence, so it cuts both ways.

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