Daniel sent me to this interesting FT article:
Questioned whether his call for true fiscal adjustment put him out of line with the fund’s call for the UK authorities to consider easing up the pace of deficit reduction while demand remained weak, Mr Carney made it clear that he did not see the level of fiscal austerity as a major constraint on the BoE’s ability to stabilise the economy.
“Central banks take fiscal policy as given and treasuries take monetary policy as given – that’s the separation,” Mr Carney said. “I’m not going to wade in [on fiscal policy] positively or negatively”‰.”‰.”‰.”‰except in the most extreme circumstances when growth threatens financial stability”.
That’s not quite a zero multiplier (because of the term ‘major’), but it’s pretty close.
And then there’s this:
One likely change of policy is that the BoE will start to steer individuals and markets towards an understanding that interest rates will probably stay exceptionally low until a threshold on unemployment or growth has been achieved. This guidance would aim to encourage spending.
Mr Carney is an advocate of such tools and dismissed fears that guidance might be counter-productive if the central bank subsequently found that the underlying health of the economy was worse and had to raise interest rates before the threshold had been reached. The incoming governor said it would be clear to individuals that inflation “is an element of the reaction function” and so such fears would not arise.
Sir Mervyn King, the departing BoE governor, expressed just such concerns this week. He told an IMF conference: “In a model it’s very simple to give guidance. But what happens if the structural interpretation of given level of unemployment changes? Then you have to backtrack and you don’t want to backtrack on conditional guidance.”
Of course there’s some truth to King’s criticism. But on balance I support Carney’s proposal to adopt a sort of “Evan’s Rule.” It’s not NGDPLT, but it’s a small step in that direction, and hence is better than current policy. Of course he still has to get the BoE to go along:
Playing down expectations stoked up by Mr Osborne that his arrival would see the pace of economic growth move up a gear, Mr Carney pointed out that the governor’s power “can be overplayed” and policy could not change without the support of others in the central bank.
“I am a member of the [Monetary Policy] Committee, so any decision is not mine – but a decision of the MPC as a collective,” he said.
Still very busy today–will get to comments tomorrow. Strong 3.2% consumption boost in Q1–that payroll tax increase sure hammered consumption!