That’s the conclusion of Richard Murphy’s latest blog. He has latched onto the latest of dozens of speeches by central bankers pointing out that for one reason or another, they don’t expect the resting point of central bank rates to be as high as in the pre-crisis period. And concluded that this means we should be adopting People’s QE – the periodic funding of public investment through the creation of new central bank money.
Actually, aside from the problems with that policy that I have explained in previous posts, there’s no reason to conclude that.
For one thing, we can contemplate raising the inflation target. I’ve proposed 4%, falling into line with a suggestion by Blanchard in 2010, to be reviewed every 5-10 years as evidence about long run equilibrium real rates shifts. Raising the inflation target will raise the terminal point for central bank rates one for one, and make more room for nominal rate cuts.
Second, we can contemplate more active use of conventionally financed fiscal stimulus policy. Simon Wren Lewis, Jonathan Portes and others have proposed just that, under the auspices of an independent fiscal council.
Third, we should remember the battery of new unconventional tools that the BoE has already availed itself of; vanilla quantitative easing; funding for lending; macro-prudential tools; and purchases of private sector assets [‘credit easing’].
Fourth, recall the solution proposed by Miles Kimball, Willem Buiter and others – to reform the institutions of money so that negative nominal rates are possible.
Fifth, we have the possibility of more concerted and coherent forward guidance, articulated as both lower interest rates for longer (than historical policy rules would suggest), and as a corresponding, conscious overshoot of the inflation target.
Sixth, there is the possibility of adopting, temporarily, in a crisis, levels-based targets, either a price level target, or a nominal GDP target, as a device to make the lower interest rates for longer, and inflation overshoot in the above solution more credible.
Seventh, in extremis, we have the possibility of helicopter drops of money direct to consumers, an old idea urged on us recently by Wren Lewis, Eric Lonergan, Mark Blyth, and others.
So there are plenty of other – to my mind far more attractive – options to consider. So far Mr Murphy has said nothing about these other options, which is curious.
If the motive is to solve a monetary policy problem, we need to know why these other seven options are less appealing to the Corbyn team.
More likely, the omission stems from the fact that they are reasoning from a financing problem [‘how can we get more stuff without borrowing to make us look crazy?’]. That there are better ways to solve a monetary policy problem is not relevant if those options don’t solve a financing problem.
[Needless to say, I don’t think there really is a serious financing problem].