In the next few days I will write a short paper on NGDP targeting in the UK. I’d be very interested in knowing why inflation remains fairly high. It looks to me like RGDP growth was about 2.35% from 2000:2 to 2008:2, and NGDP growth was about 5.15%, meaning inflation was about 2.7%. Since 2008, NGDP has been rising about 0.2%, and RGDP has fallen at about 2.2%, implying about 2.4% inflation. That’s not much of a slowdown in inflation.
Perhaps more of the UK recession is real and less is nominal than in the US. I know that London is a big international banking center. Has the financial crisis hurt the UK more than the US? I’d be curious as to whether the fall in UK RGDP is more concentrated in finance than in the US. I notice jobs have fallen much less than in the US, but that’s true most places in Europe.
Update: I forgot to mention, I’d also be interested in knowing 2, 5, or 10 year TIPS spreads in the UK.
On another topic, my critics often say that central bankers are wedded to inflation targeting; you can’t expect them to suddenly switch over to NGDP targeting. I thought of those criticisms when I read this interesting article from the Financial Times, sent to me by Ashwin:
Very subtly, Bank insiders, including members of the monetary policy committee, are beginning to complain that the criticism is overblown and the Bank should not be in the line of fire for specific price rises about which it can do little. Would it be better to bring down inflation quickly with a large immediate tightening of monetary policy and ignore the consequence on jobs and growth, some insiders ask in rhetorical asides. Others are open that the Bank is really targeting nominal gross domestic product growth of about 5 per cent a year regardless that this is not consistent with the Bank’s strict 2 per cent inflation target objective.
Secret Sumnerians? Have you noticed that every day the world seems to get a bit more “quasi-monetarist” (to use Krugman’s term for our small band of NGDP proponents.) And this article also fits with another theme I’ve been emphasizing, the illogical discussion of monetary and fiscal stimulus. There is currently a fierce debate in the UK over the coalition government’s plans for fiscal austerity. Many argue it will lead to high unemployment. But if that’s the case, then the criticism of the BOE for being too easy is borderline schizophrenic. People can’t have it both ways. If the UK has an AD problem, then, ipso facto, high inflation is not a problem. Indeed it needs to be even higher. (Draw an AS/AD diagram if you don’t believe me. QED.) If they don’t have an AD problem, then there are no valid grounds for criticizing Cameron’s fiscal austerity. So which is it? And for those Brits who do worry about inflation, why aren’t you demanding even greater fiscal austerity? Why blame the BOE?
And while I’m pathetically trying to claim credit for powerful trends in the world economy, why stop now. Here’s something Liberal Roman put in the comment section of the previous post:
I am still amazed that after the events of the past few months (which vindicated Scott in my eyes once and for all and made me a tidy investment profit) that no one and I mean NO ONE!!! is making the connection between QE and the improved economic performance the past few months.
Be they right or left, the pundits still throw out the SAME lines when it comes to monetary policy (Pushing on a string, banks not lending despite Fed printing, etc., etc., etc.).
I blame Krugman and DeLong almost as much as I do the right wingers. They are STILL apathetic towards monetary policy. Still, pining for fiscal stimulus. UNREAL!
Of course I’m far too modest to take credit for enriching my commenters, but not too modest to quote others. Seriously, there is one flaw in Roman’s argument; I claim to have no forecasting ability, because I believe in the EMH. But let’s entertain an alternative hypothesis. Suppose I am right about monetary policy and wrong about the EMH. A few months back when bloggers were listing what they had been wrong about, I mentioned the effect of QE1 on the bond markets. I would have expected the announcement to raise long term bond yields (due to the income and inflation effects) as often occurs with unexpected monetary stimulus. But yields fell sharply on the announcement. I also pointed out that yields then turned right around and rose strongly as the economy seemed to recovery a bit in mid-2009. As if markets started reading my blog.
This time around the yields fell on rumors of QE2, as it was widely anticipated by the time it was adopted. And what has happened since? Exactly the same as QE1, yields started rising rapidly almost immediately after the formal announcement, as inflation and real growth expectations rose. I presume this is where Roman made his money.
I’m guessing that my teaching income is tiny by the standards of investment banking. Surely there must be an investment bank or bond fund out there who would love to have my insights on monetary policy before they go into my blog. I don’t mind enriching my readers, but I also have to think about my family. (BTW, when businessmen use the line about “taking care of their family,” they are about as sincere as when politicians say they want to “spend more time with their family.”)