Here’s Clive Crook of the FT:
But what more can monetary policy do now? Plenty. Look at it this way. Can a central bank engineer high inflation if it chooses to? Yes, always. If it prints enough money – they call it “quantitative easing” nowadays – it can cause inflation. But if it can always cause inflation, it can always stimulate demand: the second is a necessary condition for the first.
Admittedly, the limits to the Fed’s efforts to stimulate the economy are partly prudential. At the recent meeting of its policy committee, dissenters questioned whether it was right to promise explicitly, as the central bank has, two more years of very low interest rates. Inflation hawks resist the idea of further QE. Here is the central point, however: this is a disagreement about whether further stimulus would be wise, not whether it is possible.
In my view, it is both possible and necessary. The recent revisions to the figures for growth make the economic argument so strong that I wonder if politics is not influencing the dissenters. The problem is that the Fed has to explain itself, both to Congress and to the public at large. Conditions demand what critics would call an “inflationary” monetary stimulus. The Fed’s vague mandate, which calls for both price stability and full employment, is not much help. It is a fight the Fed would rather avoid.
To make the case for new stimulus, the Fed needs better arguments. The past few weeks have settled, to my satisfaction at least, a long-running debate on this very topic. Rather than targeting inflation, central banks should keep nominal incomes growing on a pre-announced path: say 5 per cent a year. Nominal gross domestic product is the sum of inflation and growth in real output – and is the variable that monetary stimulus directly drives.
Samuel Brittan made the case for this approach decades ago on this page. The crucial point – how an increase in nominal GDP breaks down between output and inflation – is not something the Fed can determine, or should have to explain. There are pros and cons to this approach, but that is the decisive political virtue of casting the target this way.
When nominal GDP falls below track, monetary stimulus pushes it back. If inflation rises temporarily during catch-up, that is tolerated. In current conditions, this makes all the difference. The new GDP figures showed demand has fallen much further below trend than had been appreciated. With a nominal GDP target, that announcement would have led investors to expect new monetary stimulus. With the implicit inflation target that the Fed is assumed to use, it did not.
Interestingly, unlike the Fed, the Bank of England has an explicit inflation target – one it has missed so conscientiously of late that many observers believe it is following an unannounced nominal GDP target. If so, it is to be congratulated, and one day its operating mandate should be adjusted accordingly.
The Fed should move in the same direction – not, obviously, at the direction of Congress, which has its hands full getting fiscal policy wrong – but at its own initiative. Exploit that bounded independence a little more. Move to a nominal GDP regime and let the markets know, in Fed-speak, that this is what you are about. You already keep telling people, quite rightly, that monetary stimulus is not and never can be a spent force. Now would be a good time to prove it.
Exactly. I’d add that if the British really do believe inflation is too high, then ipso facto they think demand is too high. And this means that the policy of expansionary fiscal contraction has succeeded. Of course it hasn’t, but not because of fiscal contraction, rather because the Bank of England was pressured to “do something” about inflation. If the BOE is fighting inflation then nominal growth will be disappointing, regardless of what fiscal policymakers do.
HT: Marcus Nunes