UK Government Macro Policy: “Self-Induced Paralysis”
Budget 2013, key paragraph:
Monetary policy has a critical role to play in supporting the economy as the Government delivers on its commitment to necessary fiscal consolidation. To ensure that it can continue to play that role fully, the Government has reviewed the monetary policy framework in international and historical context and the Review of the monetary policy framework is published alongside this Budget. As a result, the Government has: retained a flexible inflation targeting framework and reaffirmed the 2 per cent inflation target, which applies at all times; updated the remit to clarify the trade-offs that are involved in setting monetary policy to meet a forward-looking inflation target; and has requested that the MPC provides in its August 2013 Inflation Report an assessment of the merits of using intermediate thresholds in the operation and communication of monetary policy.
I read this as “self-induced paralysis” at the highest level of government. Osborne is betting the farm on Dr. Escape Velocity (aka Mark Carney) being able to convince the MPC to do something like the “Bernanke/Evans rule” adopted by the Fed; from the new remit:
The Committee may also judge it to be appropriate to deploy explicit forward guidance including intermediate thresholds in order to influence expectations and thereby meet its objectives more effectively. This is likely to be most pertinent should the Committee judge spare capacity is likely to persist for a considerable period.
There is considerable discussion of “forward guidance” in the review of the monetary policy remit. That document discusses but specifically rules out NGDP level targeting… mainly because… can you guess it… inflation is bad! Plus some of the usual excuses, revisions, nobody understands what “NGDP” means, etc.
I see nothing at all in the new remit text which compels the MPC to do anything different to current policy. It is all about judgement. Neither did the old remit prevent the MPC from giving “forward guidance” if they so desired. (The March 2009 QE announcement remains the clearest example of forward guidance to me, the MPC said they’d do “whatever was needed” to raise nominal GDP and hit the inflation target.)
OBR forecasts for nominal GDP got another downgrade:
As suspected, it is game over. It could have been worse. But it could have been so much better.