Home > Bank of England, Monetary Policy > Mark Carney on “Regime Change”

Mark Carney on “Regime Change”

A brief review of developments in UK monetary policy over the last six months:

1. Members of the Bank of England Monetary Policy Committee make clear in speech after speech that they are very happy to reside over neverending stagnation in the UK economy; price stability will be maintained above all else.

2. We have a UK cabinet minister speaking openly about support for nominal GDP targeting.

3. Off-the-record murmurs slip into the press (here and here) that there is interest in nominal GDP targeting from both Coalition parties, and in particular from HM Treasury.

4. Osborne refuses to appoint any Bank insider as Mervyn King’s successor, instead headhunting Mr Mark Carney from the Bank of Canada.

5. Mark Carney yesterday delivered his first speech since his appointment to the BoE was announced.  And here’s a funny thing.  The speech just happens to explain why nominal GDP level targeting might be a good alternative to inflation targeting:

From our perspective, thresholds [for unemployment and inflation] exhaust the guidance options available to a central bank operating under flexible inflation targeting.

If yet further stimulus were required, the policy framework itself would likely have to be changed. [19] For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP (Chart 4).

Bank of Canada research shows that, under normal circumstances, the gains from better exploiting the expectations channel through a history-dependent framework are likely to be modest, and may be further diluted if key conditions are not met. Most notably, people must generally understand what the central bank is doing—an admittedly high bar. [20]

However, when policy rates are stuck at the zero lower bound, there could be a more favourable case for NGDP targeting. The exceptional nature of the situation, and the magnitude of the gaps involved, could make such a policy more credible and easier to understand. [21]

Of course, the benefits of such a regime change would have to be weighed carefully against the effectiveness of other unconventional monetary policy measures under the proven, flexible inflation-targeting framework.

We have the central banker about to make the leap to Governor of the Bank of England talking casually about “regime change”?  Really?  Without wishing to elevate my “cautious optimism” much higher, I’d say the UK has moved another inch down the road to targeting NGDP with that speech.

Chart 4 in Carney’s speech is the “fill the hole” NGDP level chart beloved of market monetarists the world over.  Footnote 19 in Carney’s speech is a little hint to George Osborne:

[19] In most jurisdictions, including Canada, a change in the policy framework would require the approval of the political authority. In some others, it would require a change in the constitution.

Update: Mark Carney definitely turned heads with that speech.  See also Scott, Nick and Lars, plus the Daily Telegraph, and the FT.


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