1p/2p/…/£50 = a/b/…/c as a nominal anchor that does not require measuring the price level

Here is a new post on FT’s Alphaville blog on this topic. It is somewhat crackpot. If anyone knows whether this has already been formalised please let me know.  Asking for a friend.

One thing that did not make the editor’s cut there is this….

Recapping, the basic idea is to get the central bank to target the voluntarily held denomination ratio, which I think is equivalent to it targeting the price level.

Why do this?  I don’t know.  Maybe the whole monetary framework is just not believable for some reason and we are hunting around for a reason to keep the 1p.

Bonkers though this idea is, it has one thing commending it, that denomination ratio targeting doesn’t require measuring the price level.  All it requires is being able to measure the exact number of each denominations that have been issued, which is standard business management for a Mint or Note Issue department.  This is intriguing because in modern economies we worry about our ability to measure prices when the product mix or quality of goods is changing a lot.  The advent of smartphones, apps and all the rest of it has posed just that question about our statistics. [Is the productivity puzzle a fact or an artefact?]

Having the BoE target both the denomination mix and conduct the note issue might not look good, however, as it would have an incentive to force the note mix on the private sector if outcomes were not looking good.

So that suggests delegating the note issue to a fully independent Mint [ie a Mint that would have to be as separate from the Treasury and the BoE as the current BoE is from the Treasury].  This opens up a Pandora’s Box of consequential institutional technicalities to make sure that only the BoE can do monetary policy and LOLR.  Probably something for another post.

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Here is my New Statesman post on the idea of abolishing the 1p.

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Alphaville post on the Venezuelan Petro

ICYMI:  guest post on the Petro and the Assignat.

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MPC not as split over £ as they made themselves out to be

Wednesday’s Treasury Committee hearing with the Bank of England’s Monetary Policy Committee featured an apparent squabble over whether exchange rate depreciations ‘worked’ or not.  It reads like something we could set students.  ‘OK who is wrong here, if anyone, and why?’

Andrew Haldane said, uncontroversially:  “A combination of the weaker pound, and a stronger global economy, has worked its magic…..  Depreciations work.  And that’s how they work.”

Prompted by MP Alistair Jack, Sylvana Tenreyro commented:   “[in Argentina [Jack’s words]] depreciations make people poorer.”

Mark Carney seemed to take Tenreyro’s side:   “Depreciations don’t work. They have an economic effect, but they’re not a good economic strategy.  They may be an outcome of various things… but it’s how you make yourself poorer.”

Students of open economy macro would probably find this fight confusing.  Everyone is right.  We might reasonably suppose – just as the Bank itself has – that the fall in Sterling after the EU Referendum result in June 2016 was prompted by i) a rise in the risk premium, on account of increased uncertainty about the near and long-term outlook, ii) a revision down to expected long term income per head in the UK [thus the real exchange rate] and expectations of looser monetary policy.

The combination of underlying causes that led to the depreciation [Brexit, basically] will make us poorer;  and the depreciation won’t alter that.  But the monetary policy response which in part prompted the depreciation will mean higher income per head along the transition.  So to that end Andy Haldane was right – they do work, which is why the MPC consciously engineered one. They don’t leave us better off than in the counter-factual situation in which the UK had voted Remain.  But they leave us better of than if MPC had attempted to fight to maintain the old level of Sterling.  In that case, we would be poorer along the necessary, unavoidable transition;  if they continued to try to do this, we might be very much poorer, and we would quite likely see a large recession and associated undershoot of the inflation target.

I doubt that Haldane, Carney and Tenreyro disagree about this at all.  But in the heat of the moment, Carney in particular seemed to turn the exchange into a fight.

All this has to be taken with a pinch of salt, of course, since DSGE macro has had questions asked of it of late;  and open economy macro was anyway more famous than most sub-fields for its long list of ‘puzzles’.  But this is how the BoE thinks about it, and is what is buried in the workings of the BoE’s forecasting platform COMPASS.

If I was still a staffer, I’d be urging one of the senior MPC members to rehearse a clear up of this mess, and refresh the commentariat’s understanding of how they think the exchange rate bears on monetary policy under inflation targeting.  It’s quite an important part of the framework, and it is necessary on occasion to deflect opposition to it from those with long enough memories to wish we still did target Sterling, and others with a tendency to view Sterling’s level as a matter of national pride, and anything that undermines it – eg nasty Remoaner monetary policy makers – as part of the problem.

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New Statesman blogs on 2nd Referendum and the inevitable bad politics of Brexit

In case you missed these posts on New Statesman’s The Staggers blog:

On the chances of Remain winning a 2nd Brexit referendum.

And on why the ‘could have done better’ theory of Theresa May’s government, a theory beloved of those like David Allen Green, misses the inevitability of the impasse embedded in the Leave vote.


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Changing unconditional BoE forecasts don’t mean we should take Brexit impact studies with a pinch of salt

This tweet from Laura Kuenssberg, the BBC’s Political Editor, was the latest example of how misunderstandings about the nature of forecasting have clouded the debate about the costs and benefits of Brexit.

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Today [Feb8] the BoE released its latest inflation forecast.   Unsurprisingly, there has been economic news, and the forecast has changed a bit.  Doesn’t that mean that this forecasting business, including estimating the impact of Brexit, is a bit fishy?  Can’t we therefore just set aside that economics as undecided, and focus on the cultural and political implications of Brexit?  This was the clear implication of Laura’s tweet.


The BoE’s forecast update is best thought of as a comparison between two unconditional forecasts.  Each one is conditioned on the path for market interest rates.  But that is also changing from quarter to quarter, as liquidity, the price of risk, and expectations of future rates evolve.

The Brexit impact studies are a comparison of two conditional forecasts.  In one case the forecast is conditioned on ‘stay the same’.  In the other the conditioning assumption is ‘erect trade barriers to implement Brexit’.  ‘Conditioning’ means ‘calculating what can happen under the particular assumption that one thing does actually happen.

The classic example of the difference between conditional and unconditional forecasting, whose recent ancestry is traced back to Chris Giles, is as follows.  You will find it difficult to forecast my weight in 10 years, based on information I give you about my lifestyle.  In particular because you will have trouble forecasting how my lifestyle evolves – how much craft beer and quality crisps I eat, for example.  However, you can with much greater confidence forecast how much my weight will differ, holding other things equal, comparing the cases when my beer and crisp consumption stays as it is, with the assumption [totally implausible if you knew me] that I were to give up both.

We can now update this old analogy to discuss why Laura Kuenssberg’s reference to the updated BoE inflation forecast was misplaced.

Over time, as information about my lifestyle and its evolution evolved, you would update your 10 year forecast of my weight.  And this might move around a lot.  How could you have anticipated that a craft beer shop would open on my doorstep?  Or that there would be an explosion of artisanal crisps?

But that update would not invalidate the activity of doing the forecast of the weight-reducing benefits of giving up crisps and beer, a calculation that would not change by much at all.

This seems unfathomably difficult for people to grasp.  Andrew Neil had difficulty with it in this interview with me on his Daily Politics show.  How on earth can that be an answer to my point?  He seemed to be thinking.  Iain Martin was also at it today:

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This issue has come to be one that seems to divide Remainers from Leavers;  but this is really an issue of Leaver non-economists impugning the vast majority of economists who stand behind the impact assessments of Brexit [that deduce that it would be costly].

The very small coterie of economists who actually think Brexit would be beneficial are also articulating their beliefs [as logically they must] in the form of conditional forecasts.  It’s just that those conditional forecast comparisons are different.

For them the conditioning alternative of ‘Leave’ will involve a consequential liberation of trade with non-EU countries, and deregulation of UK business that will generate more prosperity.  For the overwhelming majority of fellow conditional forecasters, these notions are absurd.  But they are members of the same family of forecast objects that anti-Brexit economists are themselves producing.

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Monetary policy insurance from the Trump tax cut / Corbyn splurge

Jason Furman, former Chair of the Council of Economic Advisors under Obama, lately lamented the lack of a macroeconomic justification for the Trump tax cut.  This tax cut, as he and others have observed, has many flaws.

Notable are:  the manifest intent to redistribute to the wealthy who need it least;  the accompaniment of this with amateurish appeals to Laffer-curve notions that it would somehow provide for a new era of much enhanced growth;  and the mendacity of the publicity around the tax cut which hides its redistributive intent away from lower-income households.

A macro justification can be salvaged, though not one that would clearly warrant what has actually passed.  As the stimulus takes effect, and assuming that the new Fed Chair Powell adopts a seamless interpretation of the Fed’s mandate, it will lead to higher interest rates, as the Fed seeks to counter the unwanted short run effects on inflation.  This would provide for more room for a future interest rate cut in the event that were a recessionary shock over the next few years.

Of course, this is insurance whose beneficial effects will not last, and will at some point in the future have to be reversed, but there is nonetheless some benefit.  One might very well wonder why the fiscal stimulus isn’t saved for the rainy day, rather than spent on a day when the weather is improving [when the US is either at or heading to full capacity].  In a situation where there was a well-functioning and rational Congress, implementing evidence-based policy, there would be no great defence to this argument.  But in current circumstances, when there is no guarantee that the argument for counter-cyclical policy would hold sway, that argument has less force.  Though this argument also applies to the expected efficacy of the compensating fiscal tightening later on.

This side of the Atlantic in the UK, the Labour Party, currently in opposition, has as its stated policy a large program of public investment.  As I remarked at a TUC roundtable on the motivations for such a program today, the argument for a fiscal stimulus on grounds of business cycle policy are, in my view, very weak.

The economy is approaching or at full capacity, and the effects of any stimulus would largely be offset by tighter instrument settings by the Bank of England’s Monetary Policy Committee.  Even if you did not buy my own take on the business cycle, you would have to concede that this is the BoE’s take too.  However, just as with the Trump tax cut, there would be the temporary benefit of having, for a few years, a different mix of monetary and fiscal policy that allowed monetary policy to respond more forcefully to the next recession.  This might be argued to be even more beneficial for the UK as we might yet face the prospect of difficulties extricating ourselves from the European Union.

The case is less clear when we recall that central banks have allowed themselves the option of doing quantitative easing when they run out of room to cut interest rates;  and there are those like Miles Kimball and Martin Sandbu who think there are no significant obstacles to stimulating the economy with negative central bank rates.  However, most central banks have eschewed negative rates;  and none support very negative rates of the sort that would have done during the 2009 crisis when desired interest rates were perhaps as low as -8%.  And there are also plausibly diminishing economic benefits and also political constraints on significant further QE.

The UK stimulus proposal differs from the US program in a major way in that it stands on its own merits.  At current very low [perhaps even negative] real interest rates, there must surely be a very long list of public investment projects that would yield positive commercial, let alone social returns.  Transport;  green energy;  broadband for all;  social housing;  even R&D into friction-reducing, Brexit-facilitating border administration technology!

A fiscal stimulus might be more compelling now if the proposal to raise the inflation target had gained proper traction.  Senior Fed officials have talked openly about it in the US, though not here, where the division of labour is such that it would be more of a faux pas for BoE officials to contemplate the idea openly.  Arguments against this idea are that it might set the central bank up for failure or extend the period of low interest rates to a point that would be politically intolerable.  A fiscal stimulus at the start of such a venture would surely help guarantee success, and limit the extent and duration of very low rates.


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