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

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Is inflation targeting dead? Central Banking After the CrisisFigure 1 Nominal GDP under different policy scenarios230210190170Actual GDP5% NGDP target4% NGDP target4.5% NGDP target1501301102Q 1997 =10090Q2/97 Q4/98 Q2/00 Q4/01 Q2/03 Q4/04 Q2/06 Q4/07 Q2/09 Q4/10 Q2/12Source: ONS, Morgan Stanley Research.Perhaps for this purpose, history will be deemed to start in July 2013 when under newmanagement? Even if bygones remain bygones until that point, a nominal GDP leveltarget could be much more demanding than a nominal GDP growth target.Assume that a 5% GDP level target was set now, but that the current OBR nominal GDPgrowth forecast was actually achieved over the next two years. Then the shortfall fromtarget would by then be of the order of almost 4%. With a nominal GDP level target,that shortfall has to be clawed back. Assuming that this is to be done over the next twoyearhorizon, then that implies a nominal GDP growth target of about 7% for each ofthose two years.Effectively, any overestimation of the sustainable real rate of growth, and suchoverestimation is all too likely, could force an MPC, subject to a level nominal GDPtarget, to soon have to aim for a significantly higher rate of inflation. Is that really whatis now wanted? Bring back the stagflation of the 1970s; all is forgiven?Whether an NGDP target is to be assessed in levels or in growth format, there are twoother reasons to be chary of it. First, its use would be operationally problematical.A nominal GDP target has several operational shortcomings in comparison with aninflation target. The data for CPI are available within three weeks of the end of eachmonth. Nominal GDP data are only available quarterly, with a lag of two months from46
Monetary targetry: Might Carney make a difference?the end of the quarter. CPI data, once published, do not (normally) get revised. Whereaspart of the frequently sizeable revisions to real GDP estimates is usually due to a switchbetween the real and inflation element of GDP. Nevertheless, nominal GDP figuresthemselves do become significantly revised, as shown below.Figure 2 Nominal GDP growth is also significantly revised1.5percentage points1.00.5Current estimate of Nominal GDP growthminus estimate in Blue Book 20100.0-0.5-1.098 99 00 01 02 03 04 05 06 07 08 09Source: Morgan Stanley Research, ONS.So, under an inflation target the MPC at least has a good idea of from where it is starting.Under a nominal GDP growth target the MPC would be flying through a current fog.The second problem is that an NGDP target would appear to run counter to the previouslyaccepted tenets of monetary theory. Perhaps the main claim of monetary economics,as persistently argued by Friedman, and the main reason for having an independentCentral Bank, is that over the medium and longer term monetary forces influence onlymonetary variables. Other real (e.g. supply-side) factors determine growth; the long-runPhillips curve is vertical. Do those advocating a nominal GDP target now deny that? Dothey really believe that faster inflation now will generate a faster, sustainable, mediumandlonger-term growth rate?If we knew what the future sustainable long-run rate of growth would be, we couldset a current nominal GDP growth target that would on average deliver that, plus 2%inflation. But we do not. Moreover, the view is steadily gaining ground that it is morelikely, than not, that real growth in the future will be below the average of past decades;47
Page 1: Is Inflation Targeting Dead?Central
Page 5 and 6: ContentsForewordviiIntroduction 10L
Page 7 and 8: ForewordSince the onset of the Glob
Page 9 and 10: ForewordThe limits of monetary poli
Page 11 and 12: Introduction• Perpetrator: Inflat
Page 13 and 14: Introductionboth transparent commun
Page 15 and 16: Introduction• Financial crises of
Page 17 and 18: IntroductionThis posed a novel prob
Page 19 and 20: Introductionuntil unemployment fell
Page 21 and 22: Introductionbalance-sheet impairmen
Page 23 and 24: Introduction• Consideration of su
Page 25 and 26: Introductionenhance actual growth,
Page 27 and 28: Introductionrather than interpretin
Page 29 and 30: IntroductionConcluding remarksInfla
Page 31 and 32: Who killed the inflation target?Lor
Page 33 and 34: Who killed the inflation target?How
Page 35 and 36: Who killed the inflation target?red
Page 37 and 38: Is inflation targeting passé?Stefa
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Page 44 and 45: Monetary targetry: Might Carneymake
Page 48 and 49: Is inflation targeting dead? Centra
Page 66 and 67: The evolution of modern centralbank
Page 74 and 75: Inflation targeting: Fix it, don’
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A broader mandate: Why inflationtar
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Will central banking change?Charles
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Central banking after the Crisis:Ch
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Challenges to inflation targeting a
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