Home > Monetary Policy > UK vs NGDPLT, More Debate

UK vs NGDPLT, More Debate

This post is just another round-up of NGDP discussion in the UK media and/or blogosphere.  Back in the old days when we had one discussion of NGDP in the UK media per month it was easy to keep up!  No longer.  In no particular order:

  1. The bond vigilantes over at fund manager M&G were not terribly impressed with the idea, worrying about how to pick the right level target, inflation expectations and supply-side capacity.
  2. Posen’s replacement on the MPC, Ian McCafferty, had an interview with  Bloomberg, written up here.  First question?  You guessed it.  McCafferty is basically a hawk and is worried about wages rising.
  3. David Blanchflower has expanded his argument against targeting NGDP in the Indy.  Blanchflower is a forceful critic and makes good arguments, so this deserves more time.  The revision data he present are to the quarterly growth rate of NGDP (which doesn’t matter) not the level (which does).  He could make a stronger argument if he presented the revisions to the level.  I want to do another post on this topic.
  4. Mark Carney got a tonne of coverage during the WEF which was well trailed; see Chris Giles here for example.
  5. Philip Booth at the IEA wonders whether the Bank is already targeting NGDP.  The short answer is “not really”, but inflation forecast-targeting will always look a bit like NGDP rate targeting if you scratch beneath the surface.
  6. BBC Newsnight political editor Allegra Stratton asks “Could ‘hot potato economics’ trigger an economic recovery?” – new insights mainly into UK politics, but any article on macro policy which uses both the words “potato” and “thermostat” is worth a read.
  7. Sticking with Auntie, Stephanie Flanders discusses “The Bank of England, the chancellor, and the target“.
  8. Simon Wren-Lewis follows up on Ms Flanders, with “When formal monetary policy targets are useful“.

On the last two points, Scott Sumner addressed the argument about credibility and time-inconsistency last year; to me it seems utterly bizarre to have this discussion in 2013, doubting whether the Bank, the government, or voters will tolerate tight money.  They are.  We are.  We have been for four damn years.  And now it’s time for a change.  Can’t it be that simple?

The argument seems to reduce to “We can’t leave the depression in case we have a boom!”  Would that be acceptable to voters if they knew it was the choice on the table?

(As an aside, I think the little people, the voters, are vastly underrated.  When I was travelling around visiting friends over Christmas there were a couple of times when people compared the current state of the UK economy with the Depression.  What’s the phrase they use?  “Money is tight”.  Yet Mervyn King says money is easy.  King is wrong and my friends were right… this time at least.  I’m too young to remember, but it made me wonder, was that also true in the 1970s, did people think “money was tight” back then too?)

Categories: Monetary Policy
  1. asdasdasd
    January 31, 2013 at 08:29

    Both King’s recent speech and Ben Chu’s interview with Weale were quite revealing.

    Neither of them appear to grasp how appallingly the economy is performing under their regime.

    For instance, let’s compare a few stats for the King and the MPC today to the Richardson’s Bank of 1970s. The UK entered recession in 1973 Q2 and 19 quarters later:

    Real GDP had increased by 4.17%
    Unemployment (ILO) rose from 3.7% to 5.7%.

    Whereas in the 19 quarters from 2008 Q1:

    Real GDP had fallen by 3%
    Unemployment rose (ILO) from 5.3% to 8.0%.

    In what way was the 70s worse than today? Judged purely on the performance of the economy, macroeconomists of the 70s did far better than King, Weale et al.

    40 years of macroeconomic research appear to have left British macroeconomists less able to deal with recessions.

    Oh also Weale’s comment “But if we were to have faster inflation in the way you describe we would be hearing quite a lot from people on fixed incomes” is utterly damning. It roughly translates as “we don’t want higher inflation because we’re scared of pensioners’ lobbyists.”

    It’s suprising that the MPC still hasn’t been able to persuade people that virtually no one lives on fixed incomes anymore, the data are not hard to find (see DWP pensioners’ income series). Pensioners, who historically were on fixed incomes, now get 43% of their incomes from benefits (generously indexed to inflation), and 26% from occupational pensions (also likely indexed). Only 7% of pensioners’ incomes come from investments, pensioners get three times as much from labour income as “investments”.

    On every conceivable measure King and the MPC have abjectly failed. They are without doubt the UK’s worst central bankers ever. History will judge them harshly.

    p.s. Britmouse – exceptional work on the blog. I do love the way the best writing on monetary policy in the UK comes neither from an established academic nor a journalist, but an anonymous blog, v. 21st century.

    • January 31, 2013 at 10:17

      Great comments asd, the stuff about pensioners’ income sources is very interesting indeed and I agree with everything you say; I just finished writing up Weale. And I appreciate the praise!

  2. Ravi
    January 31, 2013 at 19:03

    ASD: I’m not sure history WILL judge this central banking regime harshly. There is little criticism of the Fed’s performance in the 1970s (it was “OPEC” and “cost-push inflation”) or at the beginning of this current debacle (it was “the housing bust” or “bad banking”).

    Britmouse: While I’d like to agree that the colloquial use of “tight money” fits the current situation, I think that might be a stretch. Don’t forget that the song “Money’s Too Tight To Mention” came out in the early 1980s when money was decidedly not tight by market monetarist measures. But even then, linking back to my comment to ASD, the point of the song was to criticize Reagonomics, and there was no mention of Fed policy! But it’s no wonder the average person has no idea when money is tight or loose, since virtually every armchair economist today will tell you money is really easy…

    • January 31, 2013 at 20:11

      Ah no but we should use the measure of “money” as NGDP relative to trend. And the Volcker disinflation surely fits that; a deliberate nominal shock to get NGDP onto a slower – tighter – trend. Maybe I should stop pushing this one until it breaks ;)

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