Come on George, stand up for NGDP Targeting

A James Alexander post

It has been noted already by Market Monetarists and others that George Osborne and his UK Treasury team are concerned about the low level of expected Nominal GDP growth in the UK. The latest January 2016 CPI figures showing just 0.3% YoY growth will only worry them more. The correct inflation number for policy should be the GDP Deflator, not CPI, but it is also pitifully low and dragging down both RGDP and NGDP.


But whose responsibility is NGDP growth? It is no good Osborne worrying about it and then doing nothing. The Treasury sets the targets for Bank of England monetary policy.

Monetary Policy Framework: The Bank’s monetary policy objective is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment. Price stability is defined by the Government’s inflation target of 2%. The remit recognises the role of price stability in achieving economic stability more generally, and in providing the right conditions for sustainable growth in output and employment. The Government’s inflation target is announced each year by the Chancellor of the Exchequer in the annual Budget statement.

Is Mark Carney concerned by low NGDP growth? Not at all by the sound of it. He is still obsessed by managing to the Bank’s own forecast for CPI two years out, and keeping that forecast below 2%. He has UK the monetary policy set firmly for tightening. The evidence was crystal clear in this exchange  at the February press conference:

 Sam Nussey, Nikkei: Governor, with the BOJ having joined the ECB Switzerland, Sweden, Denmark, and having used negative rates, do you see negative rates as part of the BOE’s arsenal and could you envisage a situation in which they would be used?

 Mark Carney: Well let me start that discussion we had at the MPC was whether now was the right time to raise interest rates. And the judgement, as you’ve seen nine to nil, was that now was not the right time to raise interest rates, but we had a forecast – we have a forecast – which requires some increases in interest rates in order to sustainably achieve the inflation target.

And the markets understand this tightening bias, just look at UK stock markets and UK government bond yields. Sterling has been relatively weak vs the even tighter USD, and on rising trend vs the EUR although weak just recently.

The result is both lower and lower NGDP growth and lower and lower NGDP growth expectations.

Something has to change and it has to be led by Osborne and the Treasury. Central bankers change little once in office.

Osborne wants to follow his instinct and balance the budget by 2018 despite the most vocal mainstream macro-economists urging him not to. It’s sad that most are crypto-Corbynites, but that is social science academia for you, there are no jobs for free-marketers. It’s an increasingly closed shop for anyone not a socialist. Fortunately, students, and more importantly voters, aren’t so dogmatic. Our university social science departments will become like old theology colleges, with the professors just chatting amongst themselves.

Yet when Osborne ordered an inquiry into possible changes to the inflation target mandate he meekly accepted the macroeconomic consensus that there was no need to change, in fact it would be a bad thing. To his credit the crypto-Corbynites are amongst the most sympathetic to NGDP Targeting, but he shouldn’t let that worry him – they much still prefer big deficits over monetary policy.

Osborne needs to show some leadership about NGDP Targeting and not just the deficit. He should keep the CPI target if he has to, but combine the price stability and growth and employment targets into one NGDP Target. It really isn’t that difficult to understand.  He and his advisers can read some of the answers to the very weak mainstream macro criticisms here and here .

The ONS might need to raise its game a bit, but calculating NGDP really should be easier, faster and more reliable than RGDP. They should relegate the very tricky Output method of calculating GDP to the third choice (like in the US) and promote either the easier Expenditure method to first place (like in the US) or Income. The Output method was preferred once upon a time when advanced economies grew, dug or made stuff (i.e. agriculture, mining, manufacturing). The output of the dominant services sector cannot be so easily measured.

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