JimP sent me a very interesting article from The Telegraph:
Mr Carney, the current Bank of Canada governor who takes over from Sir Mervyn King next June, said central bankers should consider committing to low interest rates until inflation and unemployment met “precise numerical thresholds”, or even changing “the policy framework itself” to stimulate a desperately weak economy.
His words were directed at the Bank of Canada but will be seen as a hint that he will push for radical action in the UK, where the economy has been stagnant for two years. On his appointment, he said that he would be going “where the challenges are greatest”.
Addressing the Chartered Financial Analyst Society in Toronto, Mr Carney said that in major slumps: “To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up.
“To ‘tie its hands’, a central bank could publicly announce precise numerical thresholds for inflation and unemployment that must be met before reducing stimulus.”
He added: “If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP level target could in many respects be more powerful than employing thresholds under flexible inflation targeting.”
The 3rd and 4th paragraphs hint at level targeting, but the 5th paragraph is the bombshell. But first a little background.
On November 15, 2011, I testified (by video-conferencing) to a Canadian Parliament committee hearing on the subject of inflation targeting. I advocated NGDP targeting. Two representatives of the Bank of Canada were there; I believe one was Mark Carney. Both opposed NGDP targeting, and favored flexible inflation targeting. I should admit that like most Americans I knew nothing of Canadian monetary policy, which is why I can only say I believe Carney testified. He was on the list of witnesses, but I did not know who he was at the time, and my memory for people is poor. (For data it’s excellent.)
Carney was recently picked to head the Bank of England, so although the comments were made in Toronto and directed at the Canadian situation, they clearly have implications for Britain.
I think this also supports Matt Yglesias’s argument that to change central bank policy you must change the leadership (or at least the mandate.) Leaders with a long tenure become very invested in current policy, and if a new policy is a great success, it suggests that the previous period of weakness was caused by the central bank’s previous caution. I seem to recall he cited the Trichet–Draghi transition.
The very next sentence of The Telegraph article suggests that the current BOE chairman was unlikely to make that sort of switch.
The proposals would be anathema to Sir Mervyn, who has publicly refused to abandon the inflation target or commit to long-term low rates.
On the other hand the BOE still has an inflation mandate from the British government, so I don’t think we should take this as a sign the BOE will immediately switch to NGDP targeting. But the Earth’s tectonic plates are slowly shifting.
This evening I had dinner with an individual who has excellent connections at the Fed. He indicated that he knows for a fact that Bernanke is open to ideas such as NGDP targeting. That doesn’t mean that he supports the idea, but rather that he sees merit in some of the “outside-the-box” thinking that is currently going on. I’m sure that the recent experience with Fed policy has led Bernanke to see some advantages to the various reform ideas being kicked around, such as the ideas in Woodford’s Jackson Hole paper (which included NGDP targeting, among other ideas.) Of course Bernanke’s official statements necessarily support whatever the Fed has decided to do at the most recent meeting. This person also thought Bernanke was very well intentioned, an opinion I share.
PS. Carney is now one of the 4 most important central bankers in the world. This is a really big deal.