In the past, I’ve written that Carney and other senior BoE officials have been speaking out of turn, on subjects like ‘inclusive capitalism’, the economics of volunteering, and whether we have the right model of corporate governance. The complaints were that these are outside the BoE’s already large mandate, and encroach on territory reserved for directly elected politicians.
Were Carney’s comments also out of order when he said, as quoted by Peter Spence in the Telegraph, “The reason why one doesn’t even start on this conversation is the removal of any discipline on fiscal policy that comes from that”? Fiscal policy is, after all, a matter for government.
Actually, I think Carney was right on this occasion.
Commenting on fiscal policy in general should be considered out of bounds. But if fiscal policy is conducted in a manner that threatens the BoE’s ability to do the job entrusted to it, central bank officials are within their rights to point this out. Financing public expenditure through money-printing would likely lead to higher expected inflation, as observers consider the probability that, whatever Richard Murphy says by way of later qualification, a Rubicon once crossed will be much more easily crossed again. And that higher expected inflation will raise the costs – in terms of unemployment and real activity – of delivering inflation on target, if not become entirely self-fulfilling.
In circumstances like this, Carney’s dismissive tone was just right. Taken to the limit, the interference in the conduct of monetary policy that would be entailed by occasional monetary financing amounts to making central bank independence a sham. Better to point that out, and thereby clarify why current arrangements are not a sham.
I might point out, thought, that in the same spirit, it would also have been fine to explain how contractionary fiscal policy while interest rates were at or close to their effective lower bound also made it harder for the BoE to deliver inflation on target. Carney and others took the [in my opinion Panglossian] view that ‘they have the tools’ to compensate, so the issue for them was an academic one. But one could envisage a different MPC intervening in the debate about austerity in this fashion.