Chris Giles on intermediate targets

Here is Chris Giles in the FT:

The UK Treasury has asked the BoE to comment on the economic variables it could use as intermediate thresholds, while keeping to its ultimate 2 per cent inflation target. The BoE is likely to use some measure of slack in the economy, connecting a future tightening of policy to the moment spare capacity is judged to have fallen sufficiently as the recovery progresses.

Sadly, measures of UK slack are erratic at the moment. There is no possible way to be polite: all are useless for the task of guidance.

Inflation – the ultimate measure – is forecast to be above the 2 per cent target for the next two years, suggesting no slack, which no sensible person believes. Unemployment is no better as a measure. Its relationship to the rest of the economy has broken down since 2008, so following the Fed’s guidance would involve linking policy to a variable we do not understand. That makes no sense.

The output gap cannot be observed and a range of cyclical indicators, once preferred as markers of slack by the Office for Budget Responsibility, have behaved so strangely that they provide no help either. Since we have no idea whether the pre-crisis trend of output was sustainable, the gap between real or nominal output today and a continuation of pre-crisis trends is also useless.

The lack of a reliable measure of UK slack should not spell the end of Mr Carney’s ambitions. He just needs to go back to first principles and provide some certainty on policy related to the variables that matter for Britain’s economic health.

There is little mystery. The economy has been chronically short of growth in spending on British stuff. I could use the technical term, nominal gross domestic product growth, but the colloquial shorthand is better and easy for households and companies to understand.

Sensible policy should therefore continue with loose monetary policy until spending on UK-produced goods and services has risen to an annual rate of at least 4.5 per cent for two years. An inflation backstop is required to prevent any wage-price spiral, but given the weakness of pay growth, it is highly unlikely to be a constraint. Policy guidance is a good idea, whose time has come. But it must be linked to an economic variable that matters. In the UK, that is spending growth.

Excellent.  My only suggestion here is that an inflation backstop is not necessary to prevent a wage/price spiral, as wages follow NGDP growth, not inflation.



8 Responses to “Chris Giles on intermediate targets”

  1. Gravatar of c8to c8to
    4. July 2013 at 19:09

    the phrase inflation backstop is the perfect trojan horse to get the policy past the inflation crazies…

    it won’t matter as you say, so its harmless to leave in technically, but politically its the key

  2. Gravatar of Tom Tom
    4. July 2013 at 21:50

    “wages follow NGDP growth, not inflation”

    Most of the data suggests that all of the gains from productivity growth have dropped into the hands of shareholders rather than workers putting downward pressure on wages. Hence I agree that the inflationists miss the point, but less convinced that wages “follow NGDP growth” as they seem to be stagnating.

  3. Gravatar of Cameron Cameron
    4. July 2013 at 22:12

    The conservative’s election chances have modestly improved as of late:

  4. Gravatar of W. Peden W. Peden
    5. July 2013 at 01:33


    Would this graph help convince you-,GDP&scale=Left,Left&range=Custom,Custom&cosd=2008-01-01,2008-01-01&coed=2013-01-01,2013-01-01&line_color=%230000ff,%23ff0000&link_values=false,false&line_style=Solid,Solid&mark_type=NONE,NONE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=a,a&fq=Annual,Annual&fam=avg,avg&fgst=lin,lin&transformation=pc1,pc1&vintage_date=2013-07-05,2013-07-05&revision_date=2013-07-05,2013-07-05


  5. Gravatar of W. Peden W. Peden
    5. July 2013 at 01:35

    Sorry, wrong country. From Britmouse’s excellent blog, (read it now!) –

    Slow wage growth in the UK is what you’d expect given very slow NGDP growth over the past five years.

  6. Gravatar of BC BC
    5. July 2013 at 04:32

    As I see it he is not endorsing NGDPLT but a growth % variant. Surprised more people are not criticizing this aspect of the article.

  7. Gravatar of ssumner ssumner
    5. July 2013 at 05:23

    C8to, Good point.

    Tom, I don’t mean to suggest they are equal, but rather that they are correlated.

    BC, Yes, but the BoE is not legally allowed to do NGDPLT, however they can use NGDP as an intermediate target.

  8. Gravatar of BC BC
    5. July 2013 at 06:05

    Thanks for the clarification professor sumner

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