UK NGDP Targeting: Sceptics Round-Up
Since Mark Carney’s “regime change” speech there have been a number of responses from the sceptics, which I’ll attempt to summarize here.
1. “The BoE is targeting NGDP anyway, what’s the difference?” – this from Jeremy Warner of the Daily Telegraph. I have some sympathy with this view. You can make a reasonable case that the BoE is using the nominal GDP growth rate as an intermediate target. This was clearest when the Bank very explicitly tied the QE program to boosting nominal GDP; per the original announcement in March 2009:
The Committee judged that this reduction in Bank Rate [to 0.5%] would by itself still leave a substantial risk of undershooting the 2% CPI inflation target in the medium term. Accordingly, the Committee also resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending to a level consistent with meeting the inflation target in the medium term.
See also the invocations of “doing whatever it takes” in the minutes from that March meeting. They bet the farm on boosting the NGDP growth rate back in 2009, and that bet came off just fine. The Bank has been much less explicit in their desire to boost nominal GDP growth in subsequent announcements of QE. In July 2012 when an expansion of QE was announced, the text does not contain a single use of any of the words “demand” “nominal” or “spending”. They’re not even trying.
Mr Warner’s subsequent blog post correctly notes that NGDP level targeting is very different to rate targeting, but the basic point is that targeting a 5% rate of NGDP growth would be very much more aggressive than what the BoE is doing now. Mr Warner is a supply-side pessimist and thinks faster NGDP growth would only result in higher inflation; he might be correct but I see little evidence to support that position in the GDP data.
2. “The market response was muted, therefore we should not expect NGDP targeting to make a difference.” – this from professional sceptic Mr Chris Dillow. This again is a perfectly reasonable point. I’d say that the market response was that UK inflation and NGDP expectations rose slightly; inflation expectations did spike up a little, and the equity markets have been on a tear. I like to watch the FTSE 250 as a better indicator of domestic demand than the internationally-geared FTSE 100; the 250 broke all-time highs in the week following Carney’s speech and has carried on up. None of that is a great test and I’m not trying to make a case for excessive bullishness based on one single speech: as I said before, Carney’s speech moves us another inch forward. All eyes on Osborne now.
3. “OH MY GOD THEY’RE GOING TO PRINT MONEY AND CREATE INFLATION RUN FOR THE HILLS”. This from numerous hawks, a view which has been comprehensively debunked by many right-minded individuals around the globe; see responses from Scott Sumner, and more recently Frances Coppola and Simon Wren-Lewis.
a) The fact that NGDP data gets revised and the CPI data does not is not a fundamental property of what is being measured. On the contrary, it is a policy decision. When the CPI methodology changes (which it does) the ONS don’t retroactively apply that new methodology to the historic index data. They could, and it would create a more “accurate” view of the price index, but they don’t, because it is a design goal of the CPI (HICP) to avoid revisions.
b) I think Scott is correct that under NGDP level targeting in the UK we would have to allow “base drift” to the level target when the GDP methodology changes significantly. This is a real problem (at least for the UK), since methodology revisions have moved the level of NGDP not insignificantly. The change to the handling of insurance claim payouts in 2011 was significant, and there were changes to FISIM in 2008 which similarly moved the data.
But I don’t think this is a huge problem. The ONS tend to bring in methodology changes only once a year with the “Blue Book” update, and revise the historic data at the same time. So the level target can shift at the same time, if necessary.
c) I think Blanchflower’s claim on the need for emergency MPC reaction to GDP revisions is vastly overstated. When the government plans indirect tax changes (as it does regularly) that should move the path of future inflation. So isn’t an “emergency” MPC reaction required then, too? A 2.5% VAT hike (June Budget 2010) is far more significant for the path of future inflation than GDP revisions, but I don’t remember anybody calling for an emergency MPC response. More broadly, doesn’t any change in fiscal spending or tax plans require an “emergency MPC response” by this logic, to stabilise the future path of demand?
Markets are smart and will anticipate the central bank “doing the right thing” so long as the Bank’s mandate is clear about what the “right thing” is. NGDP level targeting is a way to provide such a mandate.
d) On lags and estimating current NGDP: starting in April this year, the UK government will be getting real time payroll data for a significant chunk of UK employers. This should give the government the ability to construct a very good estimate of real-time aggregate nominal income; employee compensation is 50% of GDP by income.
It’s often rumoured that HM Treasury has a “inside view” on the state of the economy based on the HMRC revenue data. That must be a view on the path of the nominal economy, nominal GDP. Maybe that’s just a rumour. Even if it is, the Bank of England employs a large army of very smart economists; estimating current NGDP is not an intractable problem, get some of them to work on that.