Where are the “devaluationists”?
A Resolution Foundation report on UK monetary policy reminds me of the near absence of discussion about devaluation. The report has a section on policy options to deal with the ZLB, giving five choices: QE, negative rates, higher inflation target, fiscal policy, and structural reform. You could substitute “devaluation” for QE and/or negative rates; the section on the latter only mentions the exchange rate in passing:
Nevertheless, there is much uncertainty over the longer-term consequences of this approach – with exchange rate impacts likely to be a particularly important consideration for an open economy like the UK. And of course, even if the bound can be pushed below zero, at some point a limit must be reached.
The exchange rate does not have that lower bound. In fact, if you really believe the ZLB is a problem, a sensible policy reform would be to stop targeting interest rates (plus “doing QE”) and target a currency basket. The Monetary Authority of Singapore does exactly this. The UK often seems like a small open economy with delusions of being a large closed economy. We should dump the delusions.
I am not sure why there is so little debate about devaluation compared to e.g. fiscal stimulus. This is surely not a monetarist vs Keynesian argument. The theory behind pegging the exchange rate as a way of avoiding the ZLB is arch-Keynesian. Lars Svensson and others have been writing papers on this for decades. Are memories of Harold Wilson still haunting us? I would like to believe it is not because people have supply-side views of inflation, but I suspect that’s large part of it, at least in the media. (Inflation is something that lowers our living standards, and devaluation just causes inflation.)
p.s. The Resolution report is also unreasonably ungenerous toward central bankers’ anticipation of the ZLB, citing as evidence that the BoE Governor had only used the phrase “QE” in one speech prior to 2008. That is a bit silly because the term QE was not widely used prior to 2008. Mervyn King had long discussed the liquidity trap, and persistently rejected ideas of “monetary impotence” at the ZLB. See e.g. King (1999) or his fantastic 2002 paper, “No money, no inflation“. I’d suspect we have Merv to thank for delivering QE to the UK in the face of sceptics both inside and outside the Bank.