Home > Bank of England, Monetary Policy > Just Read Chris Giles

Just Read Chris Giles

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.

  1. James in London
    April 25, 2013 at 17:46

    It was following the link in his excellent article that led me to accidentally find the Continuous Improvement Update with that news on NGDP data. I was actually going to look in vain, and as usual, to the RGDP data for some hint of NGDP figures.

    In a comment to his article that I can’t now find was very angry “Danny Blanchflower” moaning about his frustration with people ignoring his complaint that NGDP was revised so often as was therefore unreliable as a target. I think his frustration is another positive sign that we are winning the war.

    • April 25, 2013 at 22:44

      That ONS document was so good to read, James, a great find!

      Blanchflower does seem to be angry a lot, but that complaint really is absurd.

  2. James in London
    April 26, 2013 at 12:22

    From the BoE website explaining QE:
    “The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand. Despite this different means of implementing monetary policy, the objective remained unchanged – to meet the inflation target of 2 per cent on the CPI measure of consumer prices.”

    Have they ever said, or hinted, by how much they wanted to “boost nominal demand”? And how that might conflict with the 2% CPI target? Isn’t it just an oxymoron?

    You have probably blogged on this many times. But this is the challenge for Carney, what is the point of QE? I have been talking at my shop about the pointlessness of “targetless QE” (if that makes sense).

    • April 26, 2013 at 13:25

      I wrote three paragraphs about exactly this in the post I managed to lose! You have nailed it. They have never quantified the desired effect of QE *in terms of NGDP*. But they do have an IMPLICIT desired path of NGDP in the forecast data (RGDP + CPI). Charlie Bean recognized exactly this in his speech on NGDP targeting.

      So I think it is an evolutionary change for the MPC to quantify the desired effect of QE in terms of the path of NGDP, and they can call this “forward guidance”. We are so, so, so close. And look what Carney is saying this week about the “the importance of having clearly articulated policy frameworks”…


      It is possible we will get lumbered with something like the “Bernanke-Evans rule” but I do think that’s still a less likely option because the BOE will hate hate hate targeting employment or any “real” value.

  3. James in London
    April 26, 2013 at 15:51

    Fingers crossed. I guess the point of Giles’ article is that there must be a debate taking place somewhere in London, or somewhere between London and Ottawa, on the issue of “conditional guidance”. Re-reading the 24th April ONS “Emerging Issues” makes you think we are really quite close.

    One problem for me, that the MM’s have banged on about, is the way these central banker-types like power. They want to have discretion because it makes them feel important. Sumner’s automatic “target the forecast” approach is very attractive to us, but anathema to central bankers and their need for psychic income. Perhaps Carney’s super pay package puts him above the need for such non-financial income.

    • April 26, 2013 at 16:12

      Yes, with that ONS announcement, it is hard *not* to believe that wheels are turning behind the scenes.

      You are right about power. Did you watch the IMF macro debate? Woodford presented on NGDPLT and how it might be appropriate to “aim off” the NGDP path to prevent financial instability. Charlie Bean popped up in the questions and said that if they tried to close the entire NGDP “gap” it would just cause another financial bubble – or words to that effect. You’ve got to laugh – we can’t exit the bust because a boom would only trigger a bust.

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