Home > Fiscal Policy, Monetary Policy > Is the Bank of England “In Control”?

Is the Bank of England “In Control”?

Simon Wren-Lewis invites us to consider a metaphor:

In the case of central banks, zero lower bound (ZLB) denial would be a belief that ‘unconventional’ monetary policy is almost as effective or reliable as conventional policy not on the merits of the case, but because the central bank must be seen to be in control. Now no one wants to hear a pilot tell passengers that they are no longer in control of the plane. However a better analogy here would be the pilot not telling the co-pilot, because fiscal policy can also be used to stabilise the economy.

Simon cannot possibly expect to get away with this without having the blogosophere descend on him like a tonne of bricks.  Especially the day after Scott Sumner day.  (September 13th: my calendar is marked)

The Bank of England is tasked to control the rate of growth of the UK Consumer Prices Index.  They hit the zero bound in March 2009.  Fiscal austerity started in 2010, 2011, or whenever exactly it was that George Osborne started “talking down the economy“, depending on your level of fiscal fanaticism.

Now, please, somebody show me exactly when the Bank lost control of the nominal economy.  I’ve graphed here a 2% level path starting from the UK CPI level as of March 2009, against the path of the actual CPI level, and the CPI at Constant Taxes for contrast.

UK CPI Level at Zero Bound

UK CPI Level at Zero Bound

My name is Britmouse*, and I suffer from “ZLB denial”.  The issuer of a fiat currency determines its value.  It’s that simple.  Monetary policy steers the nominal economy.  Interest rates are but a tool.

* Actually it’s not.
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