By Edward Hadas
LONDON, Dec 12 (Reuters Breakingviews) - Mark Carney has missed an opportunity. More accurately, the current governor of the Bank of Canada and the future governor of the Bank of England has inadvertently shown that in intellectual terms central bankers are all at sea. His suggestion that 'nominal GDP targeting' might help in exceptional times is not so much wrong as irrelevant.
Carney is in the public eye and is also effectively between jobs, a great position to present bold new ideas. And central banking is in need of them. The existing policy framework - a narrow focus on consumer price inflation guaranteed by political independence - is inadequate and unrealistic. The authorities ignored the build up of debts in good times, became arms of the government in the worst times and in the last four years have been unable to restore either normal financial conditions or confidence in the financial system.
Nominal GDP targeting is no more than a technical refinement of the existing framework. Rather than aim their policies at a particular reported rate of inflation, central bankers would aim at a particular level of nominal GDP.
The shift is dubious, since the main purpose is to invite higher inflation without saying so directly. In a recession, real output and inflation rates both fall, so the gap between the actual and targeted level of nominal GDP is particularly wide. Under the new regime, central bankers would tolerate, or even encourage, higher inflation rates to close it, supposedly without abandoning their commitment to durably low inflation.
Carney did not mention the inflationary implications of this policy in his speech on Dec. 11. That's a shame. It is worth having an honest debate over the virtues of higher inflation rates as a lesser evil in an over-indebted world. But Carney spoke only of 'guidance' and 'expectations' - terms from the existing and inadequate approach to policy.
In reality, central bankers have moved firmly into a new world of taking political decisions about economic stimulus, financial stability and the social trade-offs involved in the sustained use of negative real interest rates and massive money-creation. Their ideas are still lagging their policies.
- Mark Carney, the governor of the Bank of Canada, gave a speech on 'Guidance' to the CFA Society of Toronto on Dec. 11. In it he discussed the role of monetary policy guidance, explaining that the Canadian central bank seeks 'to provide the appropriate degree of transparency regarding how we intend to achieve our policy objective by regularly reporting on the forces we see at work on the economy and helping markets and the public understand how policy responds.'
- He also discussed the use of policy guidance in 'extraordinary' circumstances. He suggested announcing 'precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus.' He also suggested 'adopting a nominal GDP (NGDP)-level target under which, 'bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP.'
- Nominal GDP targeting was first proposed in 1978 by British economist James Meade. More recently, it has been enthusiastically endorsed by Scott Sumner of Bentley University and Jeffrey Frankel of Harvard's Kennedy School. Charles Evans, president of the Chicago Federal Reserve Bank has suggested it might be a policy option.
- Reuters: Carney carries Canadian lessons to the Bank of England
- For previous columns by the author, Reuters customers can click on
(Editing by Chris Hughes and David Evans)
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