Mark Carney on NGDP targeting

David Beckworth has a new podcast where he interviews Mark Carney, former head of the Bank of England (and previously the Bank of Canada.) This caught my eye:

Carney: Last point if I may, what we did in lieu of moving to nominal GDP targeting, it was a reasonably healthy debate about it, which is what we wanted, was the remit is the way the UK talks about the mandate, the equivalent of that five-year in Canada. The chancellor sends a letter to the Bank of England Governor, the committee and says, this is how we interpret that inflation target or the inflation targeting framework. And what George Osborne, who was Chancellor then did his letter said, don’t forget about the flexibility and flexible inflation targeting. Don’t forget that you can stretch out the time over which you return to target from above or below.

Carney: And that turned out to be, it’s not nominal GDP targeting, but it moves you along the continuum towards that. And it’s also last point, is incredibly important because one thing that is a bit missed is that throughout the post-great recession or post-financial crisis period, the Fed and the ECB, they’re all in divine coincidence territory. So in other words, inflation is below target and there’s an output gap. And so both of those aspects pushed in the same direction for looser policy. Whereas the Bank of England quite frequently had inflation above target because of exchange rate pass through, and a big output gap. And so we needed to have a trade off. And when you get into trade off territory that’s where you need that flexibility. And that challenge is going to sound pretty familiar to people around the world.

Give that man a mug!!

This may be a bit hard to follow, as it comes in the midst of a long conversation. So here’s a bit of context. Before joining the Bank of England, Carney had made some statements at least mildly supportive of the concept of NGDP targeting. At the same time, most central banks are pretty locked into the inflation targeting approach to policy. Carney is saying that Britain’s Chancellor of the Exchequer (who gives the BOE its mandate) was sort of winking and nodding in the direction of NGDP targeting, without actually proposing the policy. There was a tacit understanding that macro outcomes would be better if the “flexible” part of flexible inflation targeting was interpreted in such a way that there might be a period of a few years when policy was expansionary despite an inflation overshoot because NGDP growth had been much more subdued than inflation.

It’s also useful to compare this statement with St Louis Fed President Jim Bullard’s recent remarks that flexible average inflation targeting moves policy in the direction of NGDPLT. Central bankers seem to increasingly understand the appeal of NGDPLT, but they are not ready to formally adopt the policy.



14 Responses to “Mark Carney on NGDP targeting”

  1. Gravatar of Michael Sandifer Michael Sandifer
    31. May 2021 at 14:46

    Back of the envelope calculations indicate that the S&P 500 has an implied NGDP growth path of just over 4%. That’s an average rate, going to infinity. This is roughly consistent with the pre-pandemic growth path, and hence represents a lot of progress for the Fed versus prior recessions.

    However, market-based inflation forecasts indicate that most of this 4% will be inflation for years to come, rather than real growth. This indicates real growth is likely to range from roughly 1.5-1.7% at best, depending on the forecast and it’s intpretation.

    My impression is that our wise blog author would not find this terribly disturbing or surprising in and of itself, since last I knew he predicted real growth in that range as the new normal years ago. The political implications, however, could be ugly and I think many Democrats would be rather horried by this result. It indicates people like Summers and Blanchard are especially way off, with their fears of high sustained inflation.

    Things may look good enough, long enough to avoid total slaughter in the mid-terms, but the next Presidential election could be interesting.

    Of course, I still think RGDP potential is in the 3-3.5% range, on average, and so I see this forecast as tragic, even absent political implications. I think the last leg of job growth will be slower than necessary and it will once again be realized, all too late, that we had tight money, though not as tight as after the Great Recession.

    The ~4% NGDP S&P 500 implicit forecast claim is based on the S&P 500 level returning to it’s pre-pandemic path, and that multiplying the last closing price by .04 yields a level of earnings (~$168) that’s just above the level they would be at($163) if earnings had grown at 4% since the pandemic began.

    Of course, for this approach to make sense, one must accept that the NGDP growth rate is the earnings yield for the S&P 500, in the long run, or anytime there’s an absence of the effects of real or nominal shocks. Theoretically, and empirically, I’m satisfied enough that this claim is supported. Since 1962, looking at annual data, average NGDP growth and the S&P 500 earnings yield, which is also the discount rate, differs by only .2%, and they vary in the short run with economic fluctuations as one would expect.

    I could be wrong, but I see this as an interesting test of my approach at reading market forecasts and increasingly think we already have the market data we need to level target NGDP. I don’t think this forecast is very close to many others at the moment, though it may be close to Scott’s, if he has one.

  2. Gravatar of Michael Sandifer Michael Sandifer
    31. May 2021 at 14:51

    I should be clear that I won’t be surprised by a burst of rebound NGDP growth, but we will then quicky settle into a slow growth recovery will trying to tick off the last bit of unemployment.

  3. Gravatar of Bain Bain
    31. May 2021 at 15:18

    > It’s also useful to compare this statement with St Louis Fed President Jim Bullard’s recent remarks that flexible average inflation targeting moves policy in the direction of NGDPLT

    Do you have a link to these remarks? Sounds interesting.

  4. Gravatar of James James
    31. May 2021 at 21:13

    Mark Carney’s memories of his time at the BoE seem rather rose-tinted. He never, ever, got the organisation to look at NGDP itself, let alone NGDP or NGDPLT. Osborne did get an inquiry into it but the grandees of the UK-macroeconomic establishment, backed by the BoE, stamped on it. Carney remained resolutely silent throughout.

    His successor has now presided over some severe monetary tightening as the GBP/USD soars. UK NGDP growth remains firmly in the doldrums, killing productivity growth.

    No surprise as the new Governor has no monetary economics background as most of his career has been in financial regulation reflecting the very broad demands of his job description. To be fair, regulation remains a thankless task at best.

  5. Gravatar of Michael Sandifer Michael Sandifer
    1. June 2021 at 03:24

    Empirically, factors that specifically affect the stock market don’t seem to undermine the implied NGDP forecasts in the S&P 500, perhaps because share buybacks help keep earnings/share on desired target paths.

  6. Gravatar of Todd Ramsey Todd Ramsey
    1. June 2021 at 05:57

    Scott, congratulations and great work! The world is coming around. Thank you.

    Question: Since the Fed has not formally adopted NGDP targeting, do you support current Fed policy as evidenced by 5 and 10 year TIPS spreads? Do you think the Fed should aim for higher or lower inflation expectations, or are they currently “just right” in your opinion?

  7. Gravatar of rayward rayward
    1. June 2021 at 06:00

    America has come to rely on rising asset prices as the path to prosperity. Whatever the merits and risks, it complicates the story of targeting, NGDP and inflation. Investors calculate rates of return more as a function of rising asset price than as a function of revenue. Indeed, one of the strongest supporters of NGDP targeting would authorize the Fed to purchase equities if NGDP growth fell below target. I have favored NGDP targeting over inflation targeting if for no other reason than the optics: who wants to be promoting INFLATION. Solving the rising asset price dilemma will be hard, really hard. Indeed, Larry Summers’s op-ed in the WP last week was actually about how the Fed is powerless to adopt a policy of monetary contraction if inflation starts escalating because it would risk falling asset prices, so less fiscal stimulus is our only option (i.e., cutting the Biden budget). Things are different now.

  8. Gravatar of ssumner ssumner
    1. June 2021 at 10:11

    Bain, David Beckworth tweeted it a few months back.

    James, Thanks for that info.

    Todd, I won’t say the Fed is exactly right, but for the moment I’m fairly content with Fed policy.

    Rayward, You said:

    “America has come to rely on rising asset prices as the path to prosperity. Whatever the merits and risks, it complicates the story of targeting, NGDP and inflation.”

    Both of those sentences are false, as I’ve pointed out numerous times.

  9. Gravatar of real story real story
    1. June 2021 at 10:26

    Very interesting and informative thanks for sharing

  10. Gravatar of Michael Sandifer Michael Sandifer
    1. June 2021 at 17:52

    Prima facie evidence for money being too tight in 2019, 2020, and 2021 is the appreciation rate of the S&P 500 index. Why should it be roughly 25% for 2019 and 2020, and almost 11% YTD? Why should it exceed the long run expected economic growth rate, if the average discount rate is very close to the average NGDP growth rate in the medium and long-term? Shouldn’t the appreciation rate and earnings rate match the economic growth rate, on average? The discount rate for the S&P 500 is the earnings yield.

    Expected NGDP growth is too low, because monetary policy is too tight, and this is also reflected in interest rates that are too low.

  11. Gravatar of David S David S
    2. June 2021 at 00:01

    So far, Scott hasn’t commented on the noise people are making about inflation–maybe that’s a topic for an article over at the Good Blog. For the next few years we have to hope that AIT policy will hold fast and that there won’t be an over-reaction by the Fed that causes a recession in 2022 or 2023. Will AIT be the gateway drug to a more robust NGDP targeting policy by the Fed someday? My guess is yes, but they’ll work their way into it with occasional changes in terminology.

    On a personal note, I’m trying to do my part for NGDP growth by eating out more. The money in my mattress is lumpy and causes insomnia.

  12. Gravatar of Rajat Rajat
    2. June 2021 at 01:00

    I might have missed the boat on this post, but I wanted to highlight that ‘flexible inflation targeting’ – and central bank discretion more generally – is fine in the right hands but dangerous in the wrong hands. The current RBA governor, Philip Lowe, has used Australia’s flexible inflation target to justify years of inaction to bring inflation back within target so that he could pursue his pet objective (as a former BIS colleague and co-author of Claudio Borio) of ‘financial stability’. See Lowe and Borio’s paper here:

    Back in 2016 when he was appointed Governor, Lowe was at pains to point out that he was “not an inflation nutter” and that bringing inflation back to target quickly could result in heightened financial stability risks, which would not be in the community’s interests – see here:

    “We’ve not seen our job as trying to keep inflation always within a very tight, narrow range. We’re not being what some have called ‘inflation nutters’,” he said. “We’ve had a more balanced perspective, recognising that some degree of variability in inflation from year to year is both inevitable and appropriate.”

    Mr Lowe said one issue the RBA discussed internally was how quickly the Australian economy should get back to the 2 to 3 per cent range on inflation. He said that while the country could achieve this quite quickly, it could be at the cost of “a deterioration in broad financial stability” and such a move “wouldn’t be consistent with [the RBA’s] mandate of doing what’s in the best interests of the Australian people”.


    Lowe finally relented in mid-2019 after 4 years of core inflation being below the lower end of the 2-3% target band and nearly 3 years since any change to the official cash policy rate (then 1.5%):

  13. Gravatar of Rajat Rajat
    2. June 2021 at 01:06

    I might add that Lowe explicitly attributed his ability to pursue a leisurely course in returning inflation to target to the RBA’s flexible inflation targeting regime. This, from 2016:

    SYDNEY—The Reserve Bank of Australia won’t be overly doctrinaire in enacting policy around its 2%-3% inflation target, its new governor told parliament Thursday.

    “It is worth emphasizing that ever since the adoption of the current framework, the Reserve Bank has been a proponent of what is known as flexible inflation targeting,” Gov. Philip Lowe said.

    Inflation in Australia is entrenched below the target rate, and is expected to stay low for some time.

    Mr. Lowe said attempting to get inflation back into the target range too quickly might invite financial-sector instability, given current debt burdens across the economy.

    “We haven’t seen our job as always keeping inflation tightly in a narrow range. We haven’t been what some have called ‘inflation nutters,’” he added.


  14. Gravatar of ssumner ssumner
    2. June 2021 at 08:21

    David, Actually, I’ve commented frequently on the inflation scare. Check my recent piece at The Hill, for instance. Or my 1970s piece at Econlog.

    Rajat, Just to be clear, I’m strongly opposed to flexible inflation targeting. I support flexible average inflation targeting, a radically different policy. But yes, it has to be implemented properly.

Leave a Reply