FT Alphaville

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Feb 6

NGDParty-pooping

Whatever the dangers of inflation expectations being permanently de-anchored by the introduction of NGDP level targeting in general, there are two reasons to believe that those dangers are particularly high for the UK:

 The UK’s relatively poor inflation record. Exhibit 2 compares average CPI inflation in the UK, US and Germany over each of the past four decades. Inflation was significantly higher in the UK than in the US and Germany in the 1970s and 1980s, and, while average inflation was relatively low in the UK during the first 15 years of inflation targeting (1992-2007), it has risen once again in the five years since the financial crisis. While we have sympathy for the view that the relatively high inflation rates of recent years can be accounted for by a series of ‘one-off’ factors, those high inflation rates have nevertheless driven long-term inflation expectations higher and left UK inflation expectations at greater risk of becoming more permanently destabilised (Exhibit 3).

 The adoption of an NGDP target is likely to require an explicit change in the BoE’s mandate, potentially giving rise to the perception of political interference. In principle, it is possible that the MPC could adopt an NGDP level target or a Fed-style threshold rule as an ‘intermediate goal’. But we find it difficult to envisage the MPC agreeing to such a proposal without a change to its mandate, implying that the switch could only take place on the instructions of the Chancellor. This contrasts with the situation in the US, where the debate is whether the Federal Reserve should unilaterally adopt an NGDP level target (which would already be reconcilable with its existing dual mandate).

That’s from Goldman’s Kevin Daly who is apparently agnostic on the issue.

Also worth noting that the UK’s current policy is pretty flexible.

Anyhoo — here are two more recent FT Alphaville posts on the topic:

Joining the Establishment, UK NGDP targeting edition - FT Alphaville
Guest post: Scott Sumner responds on NGDP level targeting - FT Alphaville

(David)