Is inflation targeting dead? Central Banking After the Crisis - Vox

Monetary targetry: Might Carneymake a difference?Charles A.E. Goodhart, Melanie Baker and JonathanAshworthLondon School of Economics; Morgan Stanley; Morgan StanleyThe Bank of England’s Governor-elect has argued for a switch to a nominal GDPtarget. This column points out problems with nominal GDP targets, especially in levels.Among other issues, nominal GDP targeting means that uncertainty surrounding futurereal growth rates compounds uncertainty on future inflation rates. Thus the switch islikely to raise uncertainty about future inflation and weaken the anchoring of inflationexpectations.The economic recovery from the 2008/9 crisis has been depressingly slow in the UK, asin many other developed countries. Further fiscal expansion is constrained by concernsabout the extraordinary (for peace-time) scale of the public sector deficit and rise inthe debt/GDP ratio. Hence politicians, and many other commentators, are looking tomonetary policy to play an even more aggressive role in getting us out of our presentstagnation.It is in this context that particular attention has been paid by the British press, and, itwould seem, the Treasury to a speech given by Mark Carney, the Governor-elect of theBank of England, in Toronto on December 11, 2012. In this he argued that, if exceptionalstimulus needed to be given, the best method could be to adopt a (temporary) target forthe level of nominal GDP, whereas most other UK proponents of nominal GDP targetry,such as Sir Samuel Brittan and Lord Skidelsky, have been advocating a target for thegrowth rate of NGDP.44