Will the UK go first?

David Beckworth directed me to this piece:

Officials in the UK Treasury are “probably” considering whether to change the Bank of England’s inflation-targeting mandate due to the massive economic shock imparted by the coronavirus crisis, according to a former minister.

Lord Jim O’Neill, who was commercial secretary to the Treasury in 2015, wants the central bank to shift from its current target of keeping inflation at 2 per cent to targeting a steadily rising trend of nominal UK GDP growth instead.

There are a few reasons why the UK might be the first to jump to NGDP targeting:

1. It’s NGDP figures are not greatly distorted by commodity price shocks.

2. It doesn’t have the deeply engrained hard money ideology of Europe and Japan. It bailed out on the gold standard relatively early (in 1931) and also bailed out on the EMS (in 1992).

3. Its government has a freer hand to change policy than in the US or Europe.

4. It’s currently ruled by pro-growth conservatives with little allegiance to hard money doctrines.

On the negative side, last time I looked they used a bizarre method of calculating NGDP (i.e. starting with RGDP), which led to significant delays and revisions. Given that we should be targeting expected NGDP 12 months forward, that’s not a big problem. But it’s likely to be perceived as a problem.



18 Responses to “Will the UK go first?”

  1. Gravatar of Anonymous Anonymous
    1. June 2020 at 10:12

    Inflation-targeting is massively entrenched institutionally at both HM Treasury and the Bank of England. I would be shocked (but delighted) if the UK goes first. The other unfortunate part of “going first” is that a lot of the benefits are likely to come from an international effort, e.g. the UK wouldn’t see major NGDPLT benefits for UK asset markets unless most other countries also followed NGDPLT (e.g. over 70% of FTSE100 earnings are not in sterling originally). This also means that whoever goes first won’t fully showcase how good NGDPLT could be if everyone did it.

  2. Gravatar of Tacticus Tacticus
    1. June 2020 at 11:10

    I can pseudonymously state that a number of BoE officials are pushing for this and that the UK Treasury is considering it. It is much more encouraging talking to UK officials about inflation mandates than US ones. However, that obviously isn’t a guarantee that the change will actually occur, or will occur first, in London.

  3. Gravatar of ssumner ssumner
    1. June 2020 at 12:52

    Anonymous, Very good points.

    Tacitus, Thanks, that’s encouraging.

  4. Gravatar of Garrett Garrett
    1. June 2020 at 14:46

    So it’s Anonymous vs Pseudonymous: who has a better read on the BoE? We’ll see

  5. Gravatar of Benjamin Cole Benjamin Cole
    1. June 2020 at 15:40

    All good on NGDP targeting, provided the target is high enough to pull real growth.

    Still, there seems a lack of clarity in macroeconomic circles, even among Market Monetarists.

    1. What tools work best to cement in , say, 5% NGDPLT? Are there some impacts, in terms of income distribution, depending on which tools are used?

    Then there are other issues left unresolved.

    1. Suppose low unemployment rates are consistent with social stability. Can a central bank, such as the Federal Reserve, rhapsodize about minimum 5% unemployment rates (as it has) if that increases social instability?

    2. If housing costs are a major concern (see Hong Kong, West Coast of the US, Canada, UK, Australia, etc.), then does housing policy need to be elevated to centrality in macroeconomic policy-making? Otherwise, to hold down housing costs (a major component of inflation, and thus NGDP), policy makers may suffocate real economic output.

  6. Gravatar of P Burgos P Burgos
    1. June 2020 at 16:49

    “It’s NGDP figures are not greatly distorted by commodity price shocks.”

    Why is this? Low production of commodities as a share of the economy, low share of commodities as a share of consumption, or both?

  7. Gravatar of ssumner ssumner
    1. June 2020 at 18:53

    Garrett, They both seem well informed to me. But then I’m easily impressed. 🙂

    Burgos, GDP does not include consumption, only production. So it’s only production of commodities that matter.

    Is that worth a post?

  8. Gravatar of Michael Sandifer Michael Sandifer
    1. June 2020 at 19:29

    Hopefully, they will be the New Zealand this time around. That should help economies escape the ZLB and negative interest rate black holes. If it doesn’t, it’s time for another conversation.

  9. Gravatar of Grant Grant
    1. June 2020 at 21:25

    What happens to equity and debt markets under NGDP targeting? If a big negative shock like covid arrives, do markets stay elevated as liquidity floods the system like is happening now (or even more so)?

  10. Gravatar of Lawrence Newland Lawrence Newland
    1. June 2020 at 23:38

    “So it’s Anonymous vs Pseudonymous: who has a better read on the BoE? We’ll see”

    I hope it’s not me! I will however add the point that it’s not just BoE that matters – it’s HMT that sets the policy that the BoE has to follow, e.g. HMT set the inflation target, not the BoE. But both institutions influence each other and a lot of BoE employees are ex-HMT (and interestingly not so much the other way round).

    Intellectually it’s probably the BoE that’s more important so even though HMT owns the policy, HMT officials and ministers are more likely to be influenced by BoE staff views than vice versa.

  11. Gravatar of Nick Nick
    2. June 2020 at 04:34

    Higher nominal GDP doesn’t mean a higher standard of living. Can central banks increase NGDP by printing more and more money? Perhaps, but doing so will merely exacerbate the economic inefficiencies that caused the need for money printing in the first place, and not allow the economy to be reorganized to reallocate resources in the most efficient way. NGDP targeting is yet another euphemism for “central planning” that the people have yet to wake up to. What will they think of next?

  12. Gravatar of ssumner ssumner
    2. June 2020 at 08:53

    Grant, Under current policy, financial markets are impacted by real and monetary shocks. Under NGDP targeting it’s only real shocks. Hence financial markets are more stable under NGDP targeting, more reflective of “fundamentals”.

    Anonymous, Did I delete the correct one?

    Nick, Central planning? LOL. You need to do a lot of homework to catch up to the current debate. Even Austrians are far ahead of you.

  13. Gravatar of P Burgos P Burgos
    2. June 2020 at 09:13

    I guess I get confused sometimes as to what is consumption and what is a factor of production. Is gasoline for commuting one or the other? Housing in metropolitan areas?

  14. Gravatar of Nick Nick
    2. June 2020 at 21:01

    Scott – I respectfully disagree. Few thoughts below.

    1.) What should the NGDP target be? 3%? 5%? Why not 15%? Should a few men in a fed board room decide this?

    2.) Once the NGDP target is set, what makes you confident that a central bank could achieve the “arbitrary” target that they set? The hubris in assuming the ease of achieving this target is humorous, and akin to Ben Bernanke dismissing the warning signs of an inverted yield curve, chalking it up to the superb puppeteering skills of the central bankers. Oh… or when he sold congress on QE by saying that it would be temporary… Remember when a small tapering of the balance sheet in December of 2018 caused a 20% decline in stocks, in a supposedly strong economy? Now lets see these clowns try to wind down a >$6trillion balance sheet… I don’t think so.. And please don’t tell me that a newly created NGDP futures market is the answer… as picking this solution apart would take another 10,000 words (as someone who has actually traded derivatives, I can tell you that this market would be fraught with issues. Not to mention your somewhat bizarre assertions that the market would have to take off, solely because there would exist a profit opportunity. There are plenty of derivative markets that failed to materialize even where profit opportunities exist). Anyways, even if you could somehow create a market that actually produced an accurate market expectation, there still is not any degree of certainty that a central bank could influence NGDP via monetary intervention. I know this may be tough on the ego of central bankers, but it is possible that markets can act independently of central bank policy. But I’ll save all of these gripes for another day.

    3.) Why would the private sector commit capital to a project if NGDP is running toward the ceiling set by the central planners? The expectation of tightened central bank policy would completely stifle possibilities for increased productivity that could only be achieved through investment.

    I had to chuckle one more time… economy blows up, arguably because of central bank intervention…Economists have next brilliant idea.

    Economist 1: ”Guys… wait.. real GDP just crashed 8%…what if we just printed more money, reflate the bubble, so that NGDP goes back up?”

    Economist 2: “Great plan. I doubt people will notice that their life still sucks and everything just costs more. Question though… how do we know we’re printing the right amount of money, or picking the right junk bonds to buy, and industries to favor?”

    Economist 1: “That’s easy. We just create a new fairyland NGDP futures derivative market that will tell us if the market agrees with what we’re doing”

    Economist 2: “Awesome. But what if no one wants to take the other side of these fairyland derivatives?”

    Economist 1: “Duhh, we could take the other side of them”

    Economist 2: “But what if we’re wrong, where would we get the money to pay our counterparties?”

    Economist 1: “Hahahaha. Dude, did you forget the part about how we can print money? We can prolly talk mnuchin into taking an equity stake in an SPV we create outta thin air to absorb the losses anyways.”

    Economist 2: “But where would treasury get the money to absorb the losses?”

    Economist 1: “Duhh, they’d borrow it”

    Economist 2: “But who would buy debt being issued to fund government derivative bets?

    Economist 1: “Hahahaha. We would. Although we may need to call it “Yield Curve Control.” QE 38 is starting to sound a bit permanent. People may start catching on to us.”

    Economist 2: “But where would we get the money to buy the debt issued buy treasury to fund the equity stake they are taking in the fairlyland spv we created to facilitate derivative bets between us and the market for purposes of validating our monetary actions to increase the cost of living so we can achieve our arbitrary NGDP target?”

    Economist 1: “What don’t you get about the fact that we print the money?”



  15. Gravatar of Matthias Görgens Matthias Görgens
    3. June 2020 at 01:23

    Anonymous, even if the UK goes alone, they would still reap the benefits in their labour markets, wouldn’t they?

    Asset prices bouncing around shouldn’t be much of a concern?

    Scott, well having any central bank at all is sort of central planning. But I doubt Nick would welcome Scott Selgin’s paradise of fractional reserve free banking with almost negligible reserves.

  16. Gravatar of ssumner ssumner
    3. June 2020 at 08:22

    Nick, You said:

    Scott – “I respectfully disagree”

    When you start off this way it would be nice to be true to your word and write a respectful post, instead of a post that is both sarcastic and mostly ignorant of what I’m proposing.

    As for your horror at the Fed picking the number, you do realize they already picked the current 2% inflation target, don’t you?

    All your other criticisms have already been addressed in the various papers I wrote advocating NGDP targeting and NGDP futures. They are online if you are interested.

    And no, your experience in the futures markets is not useful for evaluating my proposal, which is NOTHING like an ordinary futures market. It’s obvious that you don’t know what I am proposing, as a NGDP futures market with zero transactions would be perfectly fine with me.

    Matthias, He’s right that the benefit to the UK would be even greater if the Fed did it as well.

  17. Gravatar of Nick Nick
    3. June 2020 at 11:25

    Scott- the sarcasm was warranted after your petty first reply. And Yes Scott… I’m aware that Fed has picked a 2% inflation target, which is also an arbitrary, and not justified. As you can tell, I am not the biggest fan of the central banking system.

    I don’t think I am ignorant of what you are proposing. What I do think is that you take issue with someone new to the blog, who can so easily pick apart your proposal, while humorously disparaging the craziness of what has become increasingly irresponsible and socialistic Fed policy. At the end of the day, I just don’t agree that the solution to fix this new era of Fed driven bubble economies, is to simply change the metric that the central bank targets.

    And I’ve read your rebukes highlighted in your papers… I just think that they are very weak and don’t really come close to addressing the issues.

  18. Gravatar of ssumner ssumner
    4. June 2020 at 15:01

    Nick, When someone says “NGDP targeting is yet another euphemism for “central banking””, how do you expect me to respond?

    In any case, you were the one who said you’d be respectful. It’s fine if you aren’t, but don’t claim otherwise.

    If you’ve read my papers, and then write comments that are so misleading that I assume you haven’t read the papers, that’s even worse.

    You would have been better off saying you hadn’t read the papers yet; I might have cut you some slack. Reading the papers and then talking about your experience in futures markets? What? Do you have any idea what I’m proposing?

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