The Economist endorses NGDP level targeting for the UK

The Economist is clearly the best magazine on economics, politics and finance in the world. The magazine has now formally joined the Market Monetarists in formally endorsing NGDP targeting – at least for the UK.

Here is from this week’s edition:

The Bank of England has been willing to use unconventional tools. It was an early pioneer of quantitative easing; its more recent “funding for lending” scheme for banks is a clever way to bring down banks’ funding costs (and should be used to hit the nominal GDP target). But Britain’s central bank has been less successful at mapping its future policy path. The Bank has interpreted its 2% inflation target in a flexible way, keeping monetary conditions loose even as inflation has stayed higher. But it has not said how long such flexibility will last. Each time its interest-rate-setting committee meets, there is the possibility it will change its mind.

That is where the nominal GDP target comes in. By promising to keep monetary conditions loose until nominal GDP has risen by 10%, the Bank would provide certainty that interest rates will stay low even as the economy recovers. That will encourage investment and spending. At the same time an explicit target of 10% would set a limit to the looseness, preventing people’s expectations for inflation becoming permanently unhinged. It is an approach similar in spirit to the Federal Reserve’s recent commitment not to raise interest rates until America’s unemployment rate falls below 6.5%.

This is not a perfect answer. Critics point out that nominal GDP is hard to measure—and that no one knows exactly how big the shortfall in nominal GDP is, particularly since Britain’s productivity has plunged since the financial crisis. Against that, a 10% increase is a fairly conservative and clear target. Adopting it would be better for the Bank’s credibility than repeatedly missing the inflation target.

Another worry is that all the growth would come through inflation. Sterling would fall, so imports would become pricier. Asset prices might bubble up, though Mr Carney could use other tools to cool them, such as limiting mortgage lending. There is in fact little risk of an unwanted boom. All this will take place as public spending is squeezed and Britain’s main trading partners in the euro zone are likely to be struggling.

The last problem is Mr Osborne. A temporary nominal-GDP target needs his explicit support. He should give it, because against a background of tight fiscal policy, monetary policy is the best macroeconomic lever that Britain has.

As always the good people at the Economist are clever people…


This is an economist with a bow tie who endorses NGDP level targeting

bowtie moscow

Update: Scott Sumner has a less optimistic comment on The Economicst’s endorsement of NGDP targeting.

Finding wisdom in letters to The Economist

It is always a pleasure to read The Economist. Normally, however, I do not find the letters to the editor especially interesting. However, when I picked up this week’s edition of the magazine today I stumbled on an interesting letter from Paul DeRosa. Mr. DeRosa writes about what Milton Friedman might have thought of the present crisis.

Here is from Mr. DeRosa’s letter to The Economist:

“At a seminar once, I remember hearing him [Friedman] make the generalization that monetary policy is easy only when the prices of assets are rising faster than the prices of the goods they produce…In any case, this thought applied to any reasonable constructed index of asset prices reveals that the Federal Reserve is barely on the easy side of neutral, and the European Central Bank has Europe in death grip”

I find Mr. DeRosa’s comments extremely interesting. The comments are interesting because it indicates that Milton Friedman indeed paid attention to asset prices as an indicator for the monetary policy stance – something that of course is at the core of Market Monetarism. Second, I believe the Mr. DeRosa’s conclusion is entirely correct – the markets are clearly telling us that monetary policy in the euro zone is insanely tight – and that the Fed is not doing a much better job.

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