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Mark Carney has missed an opportunity. More accurately, the current governor of the Bank of Canada and the future governor of the Bank of England has inadvertently shown that in intellectual terms central bankers are all at sea. His suggestion that “nominal GDP targeting” might help in exceptional times is not so much wrong as irrelevant.
Carney is in the public eye and is also effectively between jobs, a great position to present bold new ideas. And, central banking is in need of them. The existing policy framework — a narrow focus on consumer price inflation guaranteed by political independence — is inadequate and unrealistic. The authorities ignored the build up of debts in good times, became arms of the government in the worst times and in the last four years have been unable to restore either normal financial conditions or confidence in the financial system.
Nominal GDP targeting is no more than a technical refinement of the existing framework. Rather than aim their policies at a particular reported rate of inflation, central bankers would aim at a particular level of nominal GDP.
The shift is dubious, since the main purpose is to invite higher inflation without saying so directly. In a recession, real output and inflation rates both fall, so the gap between the actual and targeted level of nominal GDP is particularly wide. Under the new regime, central bankers would tolerate, or even encourage, higher inflation rates to close it, supposedly without abandoning their commitment to durably low inflation.
Carney did not mention the inflationary implications of this policy in his speech on December 11. That’s a shame. It is worth having an honest debate over the virtues of higher inflation rates as a lesser evil in an over-indebted world. But Carney spoke only of “guidance” and “expectations” — terms from the existing and inadequate approach to policy.
In reality, central bankers have moved firmly into a new world of taking political decisions about economic stimulus, financial stability and the social trade-offs involved in the sustained use of negative real interest rates and massive money-creation. Their ideas are still lagging their policies.