Every three months the Bank of Japan publishes their forecasts for inflation, including the range and the median of board members’ individual forecasts. Here is how the median forecast of CPI ex indirect taxes has changed over the last three meetings, looking at the forecast for Fiscal Year 2014:
|Forecast date||CPI ex
|October 2012||+ 0.8%|
|January 2013||+ 0.9%|
|April 2013||+ 1.4%|
And as of today’s meeting in April 2013, the median of the board members’ forecasts for CPI ex indirect taxes looking two years forward to fiscal year 2015 is… drumroll…
I’d call that targeting the forecast, so great job so far, Kuroda and Abe. Now hold that forecast steady and do not hesitate to print, print, and print some more, until even Richard Koo “believes the lies“.
Japan has the dubious distinction of being the first major nation since the 1930’s to experience a ”liquidity trap,” in which even cutting the interest rate all the way to zero doesn’t induce enough business investment to restore full employment. The result is an economy that has been depressed since the early 90’s, and that in 1998 seemed to be on the verge of a catastrophic deflationary spiral.
The government’s answer has been to prop up demand with deficit spending; over the past few years Japan has been frantically building bridges to nowhere and roads it doesn’t need. In the short run this policy works: in the first half of 1999, powered by a burst of public works spending, the Japanese economy grew fairly rapidly. But deficit spending on such a scale cannot go on much longer.
What is Paul Krugman’s 2000 policy recommendation for Japan? The BoJ should set an inflation target and then do QE.
Here is Paul Krugman in a 2012 interview with Martin Wolf:
“The question is, what did [Ben Bernanke] do as we started to look more and more like Japan? At that point the logic says you have to find a way to get some traction. Fiscal policy might be great. But if you’re not getting it you should be doing something on the Fed side and I think that logic becomes stronger and stronger as the years go by. And it’s sad to see that the Fed has largely washed its hands of responsibility for getting us out of the slump.”
To complete the picture here is Paul Krugman writing in 2010 about how new UK Chancellor George Osborne should give up on the deficit-funded capital spending splurge, and should instead set an inflation target and print lots of money:
Oh, no, sorry, I couldn’t find that quote.
I wrote and then lost a whole post about UK monetary policy which was perhaps moderately interesting. There was no need, it turns out, because instead I could give up blogging and direct you to read Chris Giles in the FT:
With the annual growth rate of nominal GDP being so important, it is extremely disappointing that Mark Carney, incoming governor of the BoE, has backed-away from his suggestion that targeting its value would help in a depressed environment. Instead, his new big idea to shake-up the BoE is to introduce “conditional guidance” alongside monetary policy decisions – similar to the Federal Reserve’s commitment to keep the money-printing going until unemployment falls below 6.5 per cent.
Mr Carney’s idea still represents an opportunity. What is important in the Fed’s conditional guidance is that the US central bank uses the most relevant indicator of US economic health – unemployment – as its intermediate threshold in its information to markets. Substitute nominal GDP for unemployment in the UK and monetary policy is again targeting what matters.
A thousand times yes. The only thing I’d want to add is that a flexible inflation target enhanced by short-run “forward guidance” setting out a path for nominal GDP is exactly the policy regime which Michael Woodford is advocating:
As argued above, the inflation target itself does not suffice to determine what near-term policy decisions should be; and yet in the absence of a clear near-term criterion that should generate the desired rate of inflation over the medium run, the way in which the central bank’s decision procedure is supposed to maintain confidence in a particular medium-run rate of inflation remains obscure. And no inflation-targeting central bank would actually maintain that the correct near-term criterion should simply be minimisation of the distance between the actual inflation rate and the target rate, even at short horizons. Hence what is needed is a near-term target criterion, that will not refer simply to inflation, but that can be defended as an intermediate target, the pursuit of which in the near term can be expected to bring about the desired medium-run inflation rate (without an unnecessary degree of volatility of real variables). A nominal GDP-level path is an example of a fairly simple target criterion that satisfies these requirements.
There is little more to say about UK macro policy; this is what we need to do. Dr. Escape Velocity… over to you.
The “revisions” critique of nominal GDP targeting seems ever more absurd as time passes. The argument pushed by some is that it’s hard for monetary policy to target something which gets revised, like the nominal GDP statistics, but we can target the CPI because that does not get revised.
So here is brief a look at this year’s two new ONS series. First is the CPIH, which is a revised version of the CPI now including owner-occupier housing costs. Second is the RPIJ, which is a revised version of the RPI, switched to use the Jevons formula. The UK’s inflation target between 1993 and 2004 was a variant of the RPI which excluded mortgage payments, the RPIX series. The ONS now lack confidence in both RPI and RPIX to such a degree that the series are no longer designated as “national statistics”.
Given these revisions to the price index methodology, is there any change of heart from the inflation-targeters? We spent ten years targeting a price index which is now considered to be of a poor quality! Was that not a bad thing? Was not UK monetary policy “wrong”, ex post, because we now have a different – better – way to calculate inflation? Or doesn’t it matter?
The answer is surely that it doesn’t matter. We already dumped the 2.5% RPIX target in favour of a new target using a “better” methodology, 2% on the CPI, and I don’t recall anybody making hysterical arguments about how badly misguided UK monetary policy had been under the RPIX target. Methodology changes, and policy adapts.
Here is a graph of the cumulative “error” in the RPI and CPI methodology, compared to RPIJ and CPIH respectively:
Both the RPI and CPI “overestimated” inflation in comparison with the new indices. The total change in prices over fifteen years measured by the RPIJ was 6% smaller than the change in prices measured by the RPI. The change in prices over eight years measured by the CPIH was nearly 2% smaller than the change measured by the CPI.
The latter is particularly interesting; for all the talk of the Bank of England “blowing bubbles” by ignoring soaring housing prices, the inclusion of owner-occupier housing has pulled down the price index since 2005. Targeting such a price index would, if anything, have allowed slightly easier – not tighter monetary policy over the last eight years.