BoE should keep out of debates about the ideal inflation target

As Ben Chu reports, an ONS report by Paul Johnson has recommended that CPI be “replaced” with CPIH, which additionally includes imputations of the costs of owner-occupation.  Replying to a tweet of mine saying that the BoE would keep out of this debate, Ben put me in my place.  A Telegraph article he linked to reveals that Andy Haldane had explained to Treasury Committee that Bank staff were engaged in a working dialogue about the technical merits of the two measures, and that he preferred the more inclusive one.  The article also pointed out that Carney had been similarly approving.

I worry about the BoE speaking out about this, or making public that even at a working level it was seeking to influence its target.

The essence of the current system is that the Bank has independence over the setting of its instruments, but is given its goals by the Treasury.   This arrangement is a good one, because it is good for the government, which is directly elected, to retain control over the goals of the agents of policy.  Getting involved in setting the goals corrodes this separation and sets a bad precedent.  The Bank does not want to be accused of fixing its goals to make them easier to achieve.  And there are distributional consequences to changing the target, both via monetary policy, and, potentially, through any effects on the remuneration associated with index linked gilts.   As far as possible, the BoE should stay out of matters that have distributional consequences like this.

The dilemma is that through the Bank’s monetary policy making, it has accumulated a great deal of expertise in the matter.  No doubt HMT and ONS are capable of marshalling resources to make this decision, but it would seem to be inefficient to ignore the deep pool of knowledge about inflation and monetary economics in the Bank.

Is there a way out of this?

How about this:  in future, if required, the Bank seconds out of its building experts to work on reports like those by Johnson, and into HMT if necessary to help with the decision-making process.  While those staff are out of the Bank they don’t work with or consult their former colleagues at the Bank.  And the Bank itself – particularly its most senior officials – avoid commenting.


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5 Responses to BoE should keep out of debates about the ideal inflation target

  1. Anonymous says:

    A) Bank staff are perfectly capable of distinguishing between positive and normative statements, and have plenty of experience at issuing only the former.

    B) If you are worried about incentives, then you should be asking why the entity that sets the inflation target also receives seigniorage revenue.

    • Tony Yates says:

      I don’t really understand this comment.
      A) who cares. The point is that outsiders must not suspect that the goal is set in the Bank’s interest. The issue about the inflation target is a normative one (which is the best index), not a positive one.
      B) HMT set the inflation target, and get the revenues, minus the cut the Bank negotiates for itself. I presume you know this. This is a fundamental issue. But giving it to the organisation that also dispenses policy is problematic for reasons in the post. And one must trust that HMT feels democratic pressure to balance seignorage (actually a tiny fraction of public financing) with the costs of inflation. It’s done a rather good job so far. If anything, it’s erred on the side of too low inflation, as I have blogged previously.

      • Anonymous says:

        A) You argue that “as far as possible, the BoE should stay out of matters that have distributional consequences”. But it isn’t only that monetary policy affects income/wealth distributions … those distributions affect the transmission mechanism of monetary policy (for example). The BoE needs to know about these things. The BoE should be able to present these facts, as matter-of-factly as possible, in the public sphere if that helps to inform the public/government discussion.

        B) I didn’t say that the BoE should necessarily keep the seigniorage revenue either, at least in steady-state. In the short term, it’s worth stressing that the BoE’s capital levels are atrociously low, meaning that in the event of a crisis, it cannot act with the independence it prizes so much: it needs to go running to ask mummy & daddy first.

  2. Anonymous says:

    Tony – I’m really enjoying your posts on monetary policy – keep them coming!

    Are there many people at the treasury who are experts in monetary policy? George Osborne isn’t, and probably shouldn’t be expected to be. Rupert Harrison, Osborne’s chief economic advisor and another highly respected economist, has also published no papers on monetary policy. Who at the treasury has the expertise to set the inflation target?

    Is there a huge literature suggesting that the optimal inflation target should include housing costs? If there is, can you post some references?

    There is a significant literature suggesting that the optimal inflation target should focus on core inflation *not* headline inflation. We already have an index we could target – CPI excluding energy food, alcohol and tobacco, ONS: DK08. Someone should probably develop a core version of CPI-CT or CPIY as well.

    Are you confident that the MPC would not implicitly tighten monetary policy in the face of one-off tax rises or a oil price price as they did in 2008 and 2011?

    Why is Johnson opposed to raising the inflation target as proposed by Tony, and others (Blanchard, Krugman, Summers, Ball, Rogoff), or a setting a NGDP target (Woodfood).

    Are there many monetary economists in Europe who can make these judgements? The only one I know of is Lars Svensson and he has been extremely vocal in eviscerating the Swedish central bank over its ongoing ineptitude. Perhaps we need to train some more monetary economists?

    P.s. “any effects on the remuneration associated with index linked gilts” ? Are you sure about this? I thought the point of index linked gilts was that they were worth the same in real terms regardless of headline inflation. How can changing the inflation target affect the amount index linked gilts are worth *in real terms*?

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