PS on inflation targets

A post script to my last post.

To be clear, on the substance, as to whether owner-occupation costs should be included, Andy Haldane and Mark Carney, from what I read of their reported words, seem to have it right.  Inclusive is better from a theoretical perspective (optimal policy is to conserve the value of money in terms of an appropriately weighted average of all the goods and services purchased in a period), and from a practical perspective (more inclusive measures will be perceived as more legitimate).  Obviously, one cannot update for every new insight that is thrown up on the measurement of inflation, or the monetary regime will begin to look farcical, but changing once every 5-10 years might be worth it.  Note that we already had one index change, and a recalibration of the target from 2.5 to 2, in 2003, when the inflation target was changed from RPIX to CPI.

Another point on my proposed compromise between the issues of exploiting Bank expertise and the impropriety of the Bank being involved in setting its own target.  That was the model adopted when the Bank contributed to the work on the ‘five tests’ that determined whether the UK would push for membership of the single currency.  Peter Westaway, then at the BoE, was seconded to lead research work on the five tests, for the duration of that project.  It would have been awkward in the extreme for the Bank to be commenting on an issue of such political controversy that lay outside its mandate.  Yet the BoE had much expertise, personified as Peter Westaway, in open economy macroeconomics, that from society’s point of view needed to be harnessed to the Euro question.  So the secondment enabled the cake to be had and eaten at the same time.

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