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If House Prices are The Key to Full Employment…

What’s the state of UK macro according to the NIESR?

Recent GDP growth has been driven by domestic demand growth, especially consumer spending, which contributed 1.6 percentage points to growth in 2013. This has come despite further falls in real consumer wages. We expect consumer spending to remain the key driver of recovery in 2014 and 2015, supported by continued buoyancy in the housing market. House prices have seen a dramatic rise throughout the year, concentrated in London and the South East. There is considerable uncertainty over the magnitude of the impact of the second Help to Buy Scheme: stronger house price inflation would lead to even stronger consumer spending growth in 2014.

That is from last month, I quote it only because it’s typical of what City commentators are saying about UK macro.  It is interesting how ZLB macro narratives change in the UK.  It appears to me we have have shifted into phase three:

1) In Phase 1 it was asserted that monetary policy will have no effect at the ZLB – it’s a liquidity trap – printing money is pushing on a string.  Ergo, fiscal fiscal fiscal.

2) In Phase 2 it was accepted that in fact monetary policy will have an effect, but it will “only boost asset prices”, it will not help the “real economy.”  Boosting asset prices had “distributional effects” and was zero-sum: rich people owning assets gained, poor people lost out.  After all, if house prices go up, housing is “less affordable”!  Similarly monetary policy could obviously boost commodity prices – again a bad thing for the little people who want to consume those commodities.  Phase 2 was monetary policy viewed as creating supply-side inflation.  Fiscal policy, in contrast, could build real things like bridges and ergo was a better idea.

3) In Phase 3 there is a recognition that boosting asset prices does have effects on the real economy but this was probably a bad thing because it’s “unsustainable”, and it’s also due to fiscal policy in any event.

It is not obvious to me why any level of house prices would be “unsustainable” any more than any level of consumer prices would be “unsustainable”.  It’s just a price index. If macroeconomists really believe that house prices are really the key (or a key?) to boosting real growth and employment – then why not have the Bank of England target the house price index?

There is nothing magical about stabilising the CPI rate, but the HPI is special…. if only we’d known this in 2010!  Worried about the effects of fiscal austerity on employment?  Never mind, have the Bank of England target 20% y/y house price inflation, which will boost consumption and “drive the recovery”.

Categories: Monetary Policy
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