Chris Giles wrote that the Bank of England was ‘institutionally doveish’, recalling when the London Metropolitan Police was labelled as ‘institutionally racist’. I don’t agree, despite that Chris’ article pre-empted the Bank of England’s Monetary Policy Committee leaving interest rates on hold on 8 May.
The hawks/doves label gets used a lot, but it’s worth digging to recap on what it might sensibly mean. In the context of monetary policy, it could mean either: i) having the view that the inflation target should be higher than the one given to the BoE by the Treasury. Or ii) leaning towards more tolerance of deviations of inflation from target, as against fluctuations in real activity, compared to the mandate (if the mandate implies anything clear at all) or (if not) compared to your typical monetary policymaker. Perhaps we could also think of iii) a dove who considers an undershoot of the inflation target more costly than an overshoot [which would lead, if this person held sway, to guesses at the average inflation outcome to being higher]. A fourth kind of doveishness would be more innocent. Simply viewing the conjuncture right now as implying the need for more stimulus than others, or as requiring that it is not monetary policy, but, say macro prudential policy that would be needed.
Pursuing a higher than mandated inflation target would be hazardous for the career of a monetary policymaker. The MPC are individually accountable for their votes. And all recent incumbents have hoped to move on to further rewarding jobs in their careers, if not even promotion within the monetary policymaking profession. There’s a lot to risk by engaging in average inflation deceit. Pursuing it as a committee would require a great deal of private coordination and enforcement, across a shifting committee full of outspoken personalities, who would recognise that there would be benefits to being seen as the one to rescue the monetary framework from such abuse. Not impossible, but highly unlikely. Hard to pull off for a new Governor.
Being doveish on deviations of inflation from target is much more plausible. But it’s also entirely reasonable. There is no cast iron message from experience or from the academic literature to draw on regarding how such deviations should be weighed relative to fluctuations in real activity. The models that the MPC use to set policy embody the message that fluctuations in price and wage inflation from target together should be weighed an order of magnitude greater than fluctuations in real activity. But this result relies on taking the models literally. Which the MPC often don’t, overlaying their forecasts with heavy doses of judgement (no doubt wisely), and occasionally hinting that they weigh inflation versus real fluctuations roughly equally [for example, Charlie Bean’s comment that his ‘lamda’ was 1]. Contrast this with the observation Danny Blanchflower (former MPC member himself) often reminds me of on Twitter, that survey measures of respondents contentment record that inflation fluctuations cause only 1/5 the misery of unemployment fluctuations.
Based on this, you would have to say that reasonable people can disagree a lot about the relative costs of deviations of inflation from target, and deviations of activity from its natural rate. And you would therefore be hard-pressed to pronounce that a policymaker or a policy is doveish. Unfortunately, commentaries such as Chris Giles’ flourish in the silence the MPC (and other policymakers) maintain about just how they weigh their competing goals, and how they see their ‘reaction functions’ [their plans of how to respond to events as they unfold]. More constructively, the response to comments like Chris’ should be to provide enough clarity to rule out charges of doveish subersion of the mandate.
What about doveishness on undershoots relative to overshoots? Well, in my view this would be entirely justified. Overshoots can be quashed with tried and tested and relatively riskless methods for tightening: raising rates, hiking taxes or cutting government spending. Undershoots when the interest rate is trapped at the zero bound are to be avoided more energetically, because we have much more dubious tools to fight them. QE is more controversial. Even some QE believers view it as ineffectual in well-functioning markets. And some view it as effective but costly. Add to that, the current Government has been politically unable to stand by to follow a clear, discretionary policy of loosening in the face of worsening conditions. (Though, as I and others wrote before, it did loosen quietly, while insisting it hadn’t). The cost would have been to concede victory to the opposition. Also, much economic theory points to undershoots containing the danger of being forever trapped at the zero bound, enduring deflation. Even if you don’t put much weight on such evidence, the experience of Japan is enough to justify guarding against inflation target undershoots more energetically, when the zero bound is in play, than overshoots.
What about ‘conjunctural doveishness’? This is a possibility. Over time, if the apparent doveishness of the MPC were to derive from this source, we should see it reverse itself, or at least disappear, as the business cycle moves into another phase, and shocks of a different sign are experienced. Right now, it’s an open question. But once again, empirical and theoretical models could give plausible but widely disagreeing signals on the best policy right now. And reasonable people just arguing from charts and hunches could also disagree. So this is not enough to convict.
The label ‘institutionally’ doveish raises the additional possibility that the Bank’s monetary policymakers are advised by staff that fall prey to one of the intellectual flaws identified above (supposing we accept that they are flaws for the moment). Two points. First, in my experience, there was little or no staff-MPC interaction on the question of the MPC’s goals (and little discussion of which I was aware of goals, period). Second, if there were an institutional view amongst staff, it would be one that i) bought the basic idea that it is futile to try to get unemployment permanently lower by choosing higher inflation, [a piece of wisdom absorbed from their orthodox macroeconomics teaching!] and ii) that it was vital to execute the Bank’s mandates faithfully to safeguard the BoE’s reputation for not abusing its independence, ie that the mandate was sacrosanct.
You might worry that perhaps Carney, with doveishness of whatever sort, had subdued the staff with his views, and stifled challenge to them, or somehow therefore tainted the advice staff gave to other members. Who knows. But this would be a difficult task for a new Governor and one here for only 1 term. Surely a 1-term Governor does not an institutionally doveish staff make.