Simon Wren Lewis writes ‘in defence of forward guidance‘. He scolds Chris Giles, myself and others for ‘panning’ the Bank of England, for fear that it might retreat away from this bold experiment back into its natural, conservative, and insular mode of being.
Well, first, to recap on why I think they need panning.
1. The MPC deserve a panning for not attempting Forward Guidance proper when it would have had most effect, shortly after Lehman’s.
2. Mark Carney deserves a panning for appearing to take a position on the necessity for extra stimulus before he had assumed his role as chair of the MPC.
3. He deserves another for refusing simply to back down, when he realised he could not carry others on the MPC with him. The only way to explain the ‘no stimulus’ forward guidance policy is as a way for him to save face. Central bankers with meteoric careers should be above needing to save face.
4. The MPC as a whole deserve a panning for not realising that the garb of forward guidance should have been saved for when it was needed. As I wrote in my mock Carney speech, they risk being misunderstood or not believed when they engage in Forward Guidance proper.
5. Lastly, the Treasury deserve a panning for causing the mess in the first place. The expectation is that central bank independence allows them to decide on operational matters, whether more stimulus is needed or not, and how, if it is, it should be injected. The Treasury’s insistence on a review was designed to raise the costs of not undertaking Forward Guidance proper, and of not stimulating further. If it was not designed with that intention, it was extremely ill-judged not to realise that it would have that effect. Or, if that was realised, it was poor judgement to think that the other benefits of requesting a review outweighed the effect of raising the costs of not injecting more stimulus. Although, come to think of it, perhaps it wasn’t poor judgement. It was the short-termist political calculation that it was better to try to cave in central bank independence by kicking the MPC than to risk backtracking on monetary policy. The former would only damage future monetary policy forever. The latter would lose the Coalition this election for sure.
What is there to say in defence of the MPCs version of forward guidance?
1. The eventual outcome reflects well on the MPC, and on the institutions of monetary policy. Despite all the strain put on those institutions by Carney’s pre-Gubernatorial utterings, and the Treasury’s intrusion into operational matters, the MPC stood firm. For a while most of the media seemed to think that the economy had been given a kick-start. (I worry rather unscientifically that most of the country still do think this). But, in fact, the MPC did not buckle. Monetary policy is somewhat wounded, but will live on to fight another day. A positive way to look at it is that the Treasury tried to bully the Bank of England into making up for its own fiscal policy incompetence by loosening monetary policy further. But the Old Lady was not for turning. If the MPC can stand up to this blatant trespassing on operational independence, it looks all the stronger for it. Maybe people will conclude that the Treasury won’t try to play dirty again.
2. The legacy of the whole affair will probably be that the MPC will find it harder to avoid communicating about future interest rates in the future. This extra transparency will have many benefits, extolled elsewhere at length. People will come to understand monetary policymaking and what the Bank does better. The Bank will acquire extra legitimacy through exposing itself to more effective accountability, leaving the institutions governing not just monetary policy, but its other spheres, more robust.
3. An even more profound legacy, harder to appreciate from outside, is that it will help reinforce to future incumbents of MPC office that you can’t do monetary policy without forming forward plans for your instrument. This was not understood by many previous holders of that office. Many staff members who tried to explain this were dismissed as hopelessly impractical nerds. Fortunately, in the business of oil-tanker piloting, or rocket science, grasping that forward plans is seen as a necessity, not something that disqualifies you from the job.
4. If Forward Guidance proper, of the lower for longer variety, is ever needed in the future, MPC will presumably find it easier to resort to it. That’s a good thing.
What about Simon Wren-Lewis’ worry that the BoE needs gentle treatment? Is there any truth in this? Should we go easy on them, sparing them criticism that is due, in case it discourages further, more beneficial changes?
1. If this were true, I’d suggest that it was grounds for serious outside action, not a case for scribblers like me to keep schtum. It would surely be a sign of gross incompetence if an important organisation eschewed taking substantively justified steps to reform itself because it was worried about how outsiders would react. As an aside, I don’t think the Bank is inherently conservative. It has undergone radical convulsions in the last two decades. It has suffered from the fact that people don’t like to admit they are wrong. So once a policy decision is made, it’s hard to change it without a change of guard. But the institution that governs term-lengths takes due care of that, in my view, balancing that problem with the need for each new leadership team to have enough time to decide to do something and persuade the staff to do it.
2. I think there are good examples in the past to point to. Chris Giles’ pointed remarks about the Bank’s fan charts are a good example. These set analysts in the Bank scratching their heads and consulting statistics textbooks to come up with new fans, and prompted interesting new developments that might even constitute an improvement.
3. The MPC did a good job of cheerfully ignoring everything I wrote when I was inside the building. I doubt they will pay me any more heed now I am outside of it.