Home > Monetary Policy > UK Government Macro Policy: “Self-Induced Paralysis”

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:

OBR forecasts for Nominal GDP

OBR forecasts for Nominal GDP

As suspected, it is game over.  It could have been worse.  But it could have been so much better.

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Categories: Monetary Policy
  1. March 20, 2013 at 18:28

    Whre´s the ‘spirit of 1931’? They don´t make Brits like they used to (before the Bobby´s carried guns)

    • March 20, 2013 at 21:44

      They still don’t (most of them)!

      I think the spirit of 1931 was lost in the fog sometime after 1967…

  2. Rajat
    March 20, 2013 at 23:39

    This seems pretty dire to me as an uniformed observer. How could it have been worse? If the Conservatives can’t make real changes to the monetary policy framework without frightening the horses, then no one can. And what is this “intermediate thresholds” nonsense? The 2% inflation target applies “at all times” – where is the intermediate in that? Carney would have to be pretty bold to push for stimulus in light of this remit. Can’t Osborne see that without more NGDP, they will lose the next election?

    • March 20, 2013 at 23:55

      Yeah, I’m with you Rajat. The “thresholds” stuff is the so-called “Bernanke-Evans” rule. Osborne wants Carney to do Bernanke-Evans.

      • Rajat
        March 21, 2013 at 00:01

        But at least Bernanke’s had the dual mandate to work with.

  3. ChrisA
    March 20, 2013 at 23:59

    How disappointing! Labour must now be odds on to win the next election.

  4. ChrisA
    March 21, 2013 at 04:57

    Just wondering why they pushed out this document just ahead of Carney’s arrival and didn’t wait until he arrived. I would be pretty upset if just before I arrived in my new job, the management sent out a memo saying how my job should be done. Normally you get to discuss and negotiate these things, either before you take the job, or after you are in place for a while. How much was Carney consulted I wonder? Surely he can’t be working for the BoE and the Bank of Canada at the same time.

    • March 21, 2013 at 10:07

      They said Carney has been consulted, so I would presume he is on board and ready to parachute in, apply thumb screws to Dale & co… and bravely rescue us from the depths of despair.

  5. Bill le Breton
    March 21, 2013 at 08:14

    This is a cowardly Government. They have actually left it to Carney, even though he, with good reason, had asked them to sort it out before he arrived.

    BM rightly points to Lars’ piece. They have rejected a rule based policy and given Carney even more discretion and, they think, enough muddied waters to allow him to fix things without exposing their own incompetence, timidity and lack of imagination over these last three years.

    Marcus is right. The UK Establishment is second rate – which of course was in some ways recognized by the appointment of a Canadian to the Bank. It is such a tragedy that the Quad and their advisers are recruited from such a limited section of our society.

    • March 21, 2013 at 10:11

      Well I agree with much of that of course Bill, I am as disappointed as you are.

      But I can still see Carney pitching NGDPLT as a feint. NGDPLT was the radical option. HMT saw that and went for something much less radical. If Carney really wanted more discretion, he got it. That seems equally plausible to me.

      If Carney thought NGPDLT was a necessary condition of him running the BoE, he would not have signed up without being sure Osborne would deliver.

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