Please be serious: Put the toys away and just change the policy target

A James Alexander post

Eric Lonergan takes Bank of England blogger Fergus Cumming to task for not being up to speed with the very latest in the helicopter drop debate. This arcane dispute is beyond me. It is not going to happen. Central banks will never act “irresponsibly”, as the helicopter drop requires – it is not in their DNA and nor should it be. They want “serious” policies with “serious” goals – not mere illustrative thought experiments, no matter how smart.

However, Lonergan misses the core problem, one that Cumming alludes to:

“For helicopter money to work, households and firms have to believe that all future central bankers and governments want to abandon inflation targeting.  That seems implausible given current institutional set-ups.”

A central bank cannot do helicopter drops if they are tied to fixed Inflation Targeting. Central banks cannot get the public to believe the helicopter drop is serious, and the money to be spent, because of IT. The central bank would have to temporarily abandon fixed IT, and that’s hard to do credibly.

And there’s the rub.

The central bank should change it’s target. It could move to flexible inflation targeting, a distinct and much more successful policy proven in many countries. Or, even better, price level targeting. Best of all, nominal GDP level targeting.

The central banks and their political masters who set the banks’ goals should abandon strict IT and its suffocation of the real economy with low nominal growth. It really is that simple. IT works to control inflation, great, but controlling inflation is the wrong target. Targeting nominal growth is the right target and central banks should simply adopt it instead.  (Not least if adoption could also put an end to these interminable debates about monetary vs fiscal policy or helicopter drops.)

One thought on “Please be serious: Put the toys away and just change the policy target

  1. Excellent blogging.
    I do think the US could see tax cuts married to QE, a “stealthy helicopter drop” if you please.
    And yes—target NGDPLT. But think big.

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