Mark Carney comes close to endorsing NGDP level targeting

Here is Mark Carney present governor of Bank of Canada and the next governor of Bank of England:

If yet further stimulus were required, the policy framework itself would likely have to be changed.19 For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP (Chart 4).

Bank of Canada research shows that, under normal circumstances, the gains from better exploiting the expectations channel through a history-dependent framework are likely to be modest, and may be further diluted if key conditions are not met.  Most notably, people must generally understand what the central bank is doing – an admittedly high bar.20

However, when policy rates are stuck at the zero lower bound, there could be a more favourable case for NGDP targeting. The exceptional nature of the situation, and the magnitude of the gaps involved, could make such a policy more credible and easier to understand.21

Of course, the benefits of such a regime change would have to be weighed carefully against the effectiveness of other unconventional monetary policy measures under the proven, flexible inflation-targeting framework.

I stole this from Nick Rowe. Thanks for the very good news Nick – it seems like Carney will try to move Bank of England in the right direction and there is no doubt that a number of Cabinet members in Cameron’s government has sympathy for NGDP targeting.

The Bank of England showed the way in 1931 – could it do it again in 2013? I certainly hope so – now we just need an official endorsement of NGDP level targeting from the UK government. George Osborne what are you waiting for?


Scott Sumner also comments on the good news – as do Britmouse.

Leave a comment


  1. Benjamin Cole

     /  December 12, 2012

    Nice blogging.
    I just hope central banks are aggressive enough when targeting NGDP. They may have to go into QE hard and heavy.

    • Benjamin, if the BoE in fact announced an NGDP level target anything else than announce open-ended and unlimited QE to hit that target would just be plain stupid and I am pretty sure Carney realizes this.

  2. I tried not to get overexcited yesterday when I read that speech, but wow. Can this speech possibly just be the idle musings of an economist who happens to be a central banker who happens to be the next BoE Governor? Why is Osborne waiting? That’s the £1.5tn question.

    • Britmouse – yeah I have also been very excited about this for nearly 24 hours now and I am pretty optimistic that the UK government is moving in the right direction on this issue. It could happen!

  3. Bill le Breton

     /  December 12, 2012

    The title of the speech was ‘Guidance’. That is appropriate as the first use of this policy is necessarily without ‘history’ and therefore depends for its success, even more than in later circumstances, on both an understanding of the theory and a conviction that the central bank will do everything necessary to hit the new target.

    The better the ‘conviction’ the less actual intervention will be required, am I right?

    Thinking how nervous ordinary politicians are about novel policies and about how important clear messages will be to markets, is there not an urgent need for a clear explanation of what ‘will’ happen and why, and importantly what won’t happen – fear of which is probably preventing people like Osborne from instructing the Bank now, prior to the arrival of Carney.

    You could point people to Scott’s Adam Smith Institute publication, *The Case for NGDP Targeting*, but my recollection is that that explains what might have happened at the start of the recession had the policy been in widespread use, but what is needed now is what would happen when the Treasury and the Central Bank resolved to introduce it during a lengthy recession in which the wrong expectations are entrenched.

    • Bill, I have written numerous posts on these issues. I am a bit pressed for time, but I would happy to communicate with you on this issue if you drop me a mail (

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