The FT asks: Will the Treasury change the Bank of England monetary policy remit? Should it?

There are 90 opinions, some anonymous. Most reasoning is pretty lame. Below just a small sample:

Mike Wickens, University of York: It probably will but it shouldn’t. If inflation is more than 20% as the (sic) 1974 due largely to import price inflation and there is recession, should the aim be to cut growth further to achieve a nominal income target?

Professor Wickens. Things got that bad in the 1970s exactly because “the sky was the limit for NGDP”. That´s not the initial condition at present.

Willem Buiter, Citi:

Outside the euro area, the age of the operationally independent central bank let along (sic) of the operationally and target-independent central bank is pretty much over. So the Treasury may well be tempted to tinker with the numerical targets or with the nature of the target (e.g. a US-style dual mandate). Should it? There would be few benefits even if a more sensible alternative were chosen (e.g. an inflation targeting framework that includes residential housing rentals (market or implicit)). An nominal GDP growth rate target would be unhelpful. A target in the form of a path for the level of nominal GDP could be disastrous, as it requires compensation for past nominal GDP overshoots and undershoots.

Mr Buiter: Just like the 1987-07 period (Great Moderation) was “disastrous”!

David Blanchflower, Dartmouth College and former MPC member:

The Treasury should – and I suspect will – abandon inflation targeting which failed to deliver stability. It should broaden the remit to include growth although I am unconvinced of the merits of a numerical NGDP target not least because of the problem of data revisions.

I would favour an explicit targeting of the unemployment rate as the Fed has done.

Professor Blanchflower: Tobin, Ackley, Heller and Okun did exactly that in the 1960s (the “target” was unemployment below 4%). You know what the result was: the Great Inflation!

George Buckley, Deutsche Bank:

No, and no. Nominal GDP targeting in an era of potentially far slower trend growth could generate sizable increases in inflation. This could lead to a serious loss of credibility for the authorities, substantially higher long-run inflation expectations and in the long-run a deterioration in the trade-off between underlying growth/employment and inflation. There is no short-run fix or free-lunch – we have to accept that a period of excessive growth in the run up to the credit crisis needs to be matched by equally slower growth going forward to meet the inflation target. Inflation should always form the basis of the monetary target in a regime of fiat currencies (although there are possible ways to tweak its operation without losing credibility).

Couldn´t expect anything different from somebody working for a German Bank!

Andrew Smithers, Smithers & Co:

It should, but seems unlikely to make a sensible change. For example it should move the target to allow for a fall in the exchange rate, but should not introduce nominal GDP targets, a recipe for stagnation.

“A recipe for stagnation”? Where does that idea come from?

Peter Dixon, Commerzbank:

Having spent the last 15 years extolling the virtues of an explicit inflation target, there is a major credibility issue associated with junking it in favour of something like a nominal GDP target, which in the current environment of sluggish growth implies tolerating much higher inflation – the complete opposite of today’s policy. And the idea of conditional interest rate targets (such as the Fed has recently introduced) may well make the central bank a hostage to fortune. However, the fact that the BoE targets a price index which is subject to influences beyond its control serves only to highlight the weakness of the current system. I am tempted to suggest that the BoE’s target index be refined to include housing and exclude indirect taxes, but that still won’t prevent distortions caused by things like university tuition fees. The alternative is simply to leave the inflation target in place and maintain the fiction that it still matters. After all, if we change it now we will simply end up changing the mandate in future when circumstances conspire against it.

The Germans really “indoctrinate” those foreigners working for them!

David Riley, Fitch Ratings:

It would be a surprise if the Treasury amended the Bank of England’s inflation mandate. With inflation persistently above target, QE and large public sector deficits and debt, changing the Bank’s monetary policy remit could prompt investors to reassess UK inflation risk and drive up gilt yields.

Brilliant comment from a “rater”! He must be itching to downgrade gilts!

Sir Samuel Brittan, Financial Times:

Remit will change slowly and reluctantly. It certainly should.

Sir Samuel: Deep down you root for the change to be “fast and furious”! After all, you´ve been a fan since James Meade proposed it back in the 1970s.

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