James of London sent me the BoE’s new policy document. On pages 23-26 they discuss the arguments for and against NGDP targeting. But it’s clear from the discussion that they either don’t understand the arguments for NGDP targeting, or they intentionally chose to ignore them. They talk as if changes in productivity growth would create problems for NGDP targeting, whereas of course that’s the whole point of NGDP targeting. When you have productivity shocks an adherence to inflation targeting will create business cycles. Yes, inflation rates will fluctuate with NGDP targeting, but that’s what you want to happen. Stable inflation is bad.
Their other arguments are also wrong. The claim that the public understands inflation targeting is almost laughable in the current British context. Inflation has been running above target for years and the BoE is trying to raise it even higher with policies like QE. How is that “understandable?” When inflation in America was 1% and Bernanke announced that he was trying to raise inflation up to the target, the public was outraged. Almost no one in the public understands inflation targeting. “How can a higher cost of living be a good thing?” If they said they’d like to see the aggregate incomes of the British people rise at a steady 4.5% a year, people would at least understand the objective.
The revisions issue is a red herring, as the central bank should target the forecast.