When reconverting to Catholicism in order to ‘upgrade’ from being King of Navarre to become King of France, Henry IV is alleged to have said: “Paris vaut bien une messe” (Paris is well worth a Mass). Now, anticipating his move from Governor of the Bank of Canada to Governor of the Bank of England, Mark Carney “indicates” he would be willing to “renounce” IT and “embrace” NGDP-LT (where LT stands for “Level Target”).
And he states the reason (my bolds):
From our perspective, thresholds exhaust the guidance options available to a central bank operating under flexible inflation targeting.
If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP.
And why would he be willing to contemplate a “conversion” from his IT ‘faith’ (even if of the flexible variety) to NGDP-LT?
The charts below give an indication. In the UK, nominal spending had progressed very close to trend. It´s fall ‘from grace’ has been very significant. In Canada not as much. Chart 4 in Mark Carney´s speech clearly states that ‘bygones are not bygones in NGDP-LT, so an effort to get back the economy back close to trend is warranted.
Carney further states:
However, when policy rates are stuck at the zero lower bound, there could be a more favorable case for NGDP targeting. The exceptional nature of the situation, and the magnitude of the gaps involved, could make such a policy more credible and easier to understand.
Of course, the benefits of such a regime change would have to be weighed carefully against the effectiveness of other unconventional monetary policy measures under the proven, flexible inflation-targeting framework.
The optimistic me reasons that´s just Mark Carney not wanting to be too blunt and scare the “faithful”. I´m certain that if NGDP-LT is proven justified under an “Exceptional nature” it can easily be generalized to be justified in any situation, or in “all seasons”.
Just yesterday I published a post dealing with research that found that “Even central bankers get the new-job jitters”:
In central bank parlance, new officials are more likely to act like “hawks,” policy makers who are relatively more worried about inflation getting out of control. Policy “doves,” meanwhile, are sometimes more concerned about other economic problems, such as unemployment, and can be willing to let prices rise temporarily.
Luckily Mark Carney is not a “new official”. He´s moving from one ‘Governorship’ to another and, hopefully, giving advance notice of his preferred strategy for the new job (the other actors involved, in particular PM David Cameron better start the ‘conversion ball’ rolling).
Obviously, the British press had a field day. My preferred headline was from the BBC:
Mark Carney suggests targeting economic output
Mark Carney, who will take over as governor of the Bank of England next year, has suggested targeting economic output instead of inflation.
They make it sound like a fait-accompli.
PS. Bernanke, take notice. Mark Carney has just told you guidance-cum-thresholds will not cut it for the US.