Recently, ex-MPC member Danny Blanchflower, known for his ‘dove-ish’ views on interest rates, wondered who would get the ‘dove-ish’ seat on the Monetary Policy Committee that David Miles was vacating [leave aside that DM would reject that label], and Danny and others before him had filled.
This begs old questions like what is a dove or a hawk anyway, and are there places for these people on the Committee. The answer, in my opinion, is: yes and no!
The inflation targeting mandate is decided by the Treasury, so there is no question that those who are not prepared to accept that objective – and put aside their own personal views about the optimal inflation rate – should not be given the job. Otherwise, the delicate but beneficial separation of powers [between the power that the BoE has to control the instrument as it sees fit, and the power of HMT to set the goal that the BoE aims for] would be lost.
The MPC are, however, asked to determine the ideal trade-off between fluctuations in inflation and real activity. Partly because there is no hard and fast answer to this important question, it is delegated to the experts. And for the same reason, there is scope for disagreement amongst MPC members about that trade-off. Reasonable people can differ on unsettled questions in economics.
A ‘dove’ might then be someone who is relatively tolerant of inflation fluctuations, and prefers instead to keep unemployment/real activity stable. Given a long enough run of business cycle experience, however, that should not translate into this dove voting for a level of interest rates that differs from average from someone who was hawkish defined this way.
Since that’s true only for a ‘long enough run’ of experience, though, it might well be possible for an MPC member to differ on average for 1, 2 or even 3 year terms, and still be behaving in a way that is acceptable according to this technical definition of a dove. Such a person would be hard to distinguish from an MPC member that simply preferred a different inflation rate from the target set by HMT.
On this definition of a dove, there probably is a role for seeking out a range of views for the MPC and ensuring balance. Ideally, the only qualification would be a preparedness to look at the question of the trade-off afresh and assess on the basis of the evidence at the time. But, since it’s hard to verify whether this is being done faithfully, and people inevitably have prior exposure to this grandest of policy questions, that ideal is not likely to be feasible. So it would be natural to seek a distribution of views that reflects professional uncertainty about the trade-off.
So, if there is a role for these kind of doves and hawks, how would you find them? If life were as simple as a New Keynesian model, you could simply ask them about a few of its primitive parameters and be done with it. But it’s not. Could you just ask them whether they were comfortable with the current policy stance to get a feel for their trade-off-dove-ishness relative to those currently voting?
Sometimes. But the read-across from trade-off dove-ishness to views about the current policy stance would not always be straightforward. As the MPC were experiencing a large trade-off inducing shock in the early phase of the crisis, allowing inflation to rise to >5% as output and employment were driven down, the job was easier. A trade-off dove was one that was relaxed about the choice to allow inflation to go so high.
However, supposing that right now we are in the middle not of a trade-off inducing shock, but a straightforward case of too-weak demand, [driving both inflation and activity below ideal levels] then you can’t infer trade-off dove-ishness from how relaxed people are about the current large undershoot of the inflation target.
For all these reasons, it would not be right to try to populate the MPC with doves or hawks more conventionally defined – just preferring lower or higher interest rates right now, simply for the sake of it.
Of course there’s more to it than the above lets on. If there were not, there would be no scope for disagreement about the current level of interest rates. Assuming that I diagnosed the current shock correctly. But of course I may not have; and in fact there may be reasonable disagreement about the extent to which the current constellation of shocks is trade-off-inducing. And there may be disagreement about the costs of pulling the policy levers to stabilise the economy. Or disagreement about the persistence of the shocks hitting the economy. Or, in fact, about any number of things.
None of these things mitigate against seeking a range of views about the current level of interest rates. Far from it, but they do mean that it could be hard to know what kind of person you are getting for your current interest rate vote, so that conventionally defined ‘doveishness’ is not to be prized for its own sake. [Or hawkishness for that matter, of course].