Two cheers for David Miles

A James Alexander post

David Miles is leaving the Bank of England rate-setting committee at the end of August and has been giving a few farewell interviews.

To his credit he never voted for a rate rise (or cut) during his term in office, but he does feel a bit frustrated for having “done nothing”. What he doesn’t understand is that monetary policy has loosened and tightened a lot during his time on the MPC nonetheless.

Any given rate stance of a central bank can be tight or loose monetary policy depending on NGDP Expectations. And those expectations have moved around a lot over the six years he’s been on the MPC, as it includes the early recovery from the GFC and the 2011 ECB-caused Eurozone crisis.

He’s done lots despite not tinkering with rates. And credit to him especially for not joining the UK hawks on the MPC in 2011 voting for rate rises.

Miles’ interview with Bloomberg does, however, contain this very common error, one central bankers on both sides of the Atlantic seem to be making:

Miles cautioned that delaying an increase might require faster tightening.

“The longer you leave it, the slightly more steep that trajectory becomes,” he said.

What is the evidence for this theory, or rather fear, of having to “catch-up”? None is ever presented. Have underlying inflation expectations ever shot up so fast that a central bank is forced to slam on the brakes? Of course not. Underlying inflation expectations change glacially slowly.

Headline inflation may jump about but VSP central bankers should be able to rise above such noise.

To make their lives easier central bankers should switch from Inflation Targeting to Expected NGDP Growth Targeting, and then they won’t get distracted by hard to measure inflation, wage growth or even employment/unemployment figures. In fact, central bankers could be replaced altogether for a machine that followed this simple rule.

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