Is Labour right to review the BoE mandate?

This is the question posed in Robert Peston’s blog today.   My answer:  yes and no.

No, also, because while no mandate, certainly not the existing BoE one, is likely to be word-perfect, there should be a pretty high bar set for conducting a review, and there should not be too many of them.  The reason being that if frequent reviews became the norm, we would inject unwelcome macroeconomic uncertainty.  Obviously, there is a balance to be struck.  The whole point of retaining the power to set goals, and delegate just instrument control, is to be able to reset them at some point.

It’s probable that the Corbyn team recognise this, but yet feel that the magnitude of the BoE’s departure from a policy it would have preferred is such that a review is necessary.  [Hence, the prior, less qualified desire take back ‘democratic control’ over monetary policy, and to devise a new quantitative easing that prioritised ‘the people’].  The desire is to point the finger for the trajectory of the economy through the crisis at monetary policy.  In my view, that analysis is wrong.  The culprits were fiscal and regulatory policy.  The small quibbles I might have with the way things are don’t warrant another review so soon after the last one.  And we should remember in this regard that HMT itself conducted just such a review in 2015.

No, also, because, if one edits out the urges to get the BoE to care about all kinds of things it can’t do much about, and instead replaces these with the more legitimate question about wheher the BoE was sufficiently mindful of the stability not just of inflation, but also of the real economy, we discover that this is indeed emphasised throughout the recent 2013 Review.  The UK’s mandate is one of ‘flexible inflation targeting’.  And, moreover, prior to the Review’s publication, it was judged to have been interpreted as such.  For me this means that the BoE is being asked to do what monetary policy can and should.

Some might have the appetite to use a remit review to push for the BoE to be given a target for nominal GDP.  But, as I have said before, I don’t think this is worth the trouble either.  Nominal GDP growth targets, in practice, would not deliver policy much different from what we have had.  Levels targets, advanced as a way to help deal with the zero bound to interest rates by engendering commitments to reverse a recession, are not justified because the benefits that derive from them rely on the extremely unrealistic assumption that policy can be taken to be acting under commitment, and that people in the economy have rational expectations.  Both preclude weighing other factors;  that the weight on some components of GDP shoudl be larger than others;  that policy should consider nominal wage inflation, the real exchange rate, and so on.  So, the remit is not worth changing on this account either.

But there are some things to discuss that might warrant action, even if these don’t need to amount to a review of the mandate.  I mention them in case readers think I am out to defend the BoE at all costs.

For example.

1)The BoE could be urged to be more transparent about the MPC’s plans for interest rates.  Such plans must have been formed, if the MPC is to have voted coherently over today’s interest rate, and the case for concealing these plans, or at best forcing us to infer them indirectly, is in my view weak.

2)More transparency too could be urged on the BoE to make available working versions of its model, and with judgements applied by MPC to produce the forecasts.

3)We could ask the MPC to explain more precisely just how it trades off the stability of real and nominal things, and how it weighs – as it should – concerns about nominal wages, the real exchange rate.

4) And we could ask it to update us periodically about how it sees its ‘reaction function’ – how, ahead of time, it plans to respond to different kinds of events, and the benchmark policy rules that might inform such a plan.

5) We could also tighten up and clarify that the MPC itself has the responsibility to decide not just ‘how much’ assets are bought under QE, but also ‘which assets’.  Formerly, the BoE executive reserved the right to decide ‘which’, a division which some MPC members [Blanchflower and Posen, for exmaple] were unhappy with, since it precluded credit easing in the early stages of the crisis, when the BoE executive were against it.

6) More radically, we could institute that when the floor to interest rate binds, or looks likely to, HMT and the BoE consider a discretionary fiscal stimulus jointly, to make up for the missing monetary policy stimulus, with the former working out how, in the context of whatever other fiscal rules are followed, that maps into a trajectory for clawing back the incurred debt in normal times.  This stimulus would, of course, be financed using conventional borrowing, and not via money creation.

7) We could consider beefing up the scrutiny of the policy decisions and economic analysis conducted by the BoE, using published reports commissioned from 3rd parties as the basis for Treasury Committee hearings, rather than such scrutiny hinging on the agility of TC’s non-specialist MPs in the ring with the BoE’s executive team.

8) Raise the inflation target from 2-4, with 5-10 yr reviews of developments in the equilibrium real interest rates.  [After a period where we have demonstrated we can hit the current target again]. [And h/t Dan Davies who spotted that I had forgot this item].

With the exception of 6), however, none of these matters need be described as a remit review.  They are debates about the operational framework of monetary policy.  Even the issue of raising the inflation target does not itself need a ‘remit review’.  The number 2 is confirmed by letter, each year, under the current framework.  So 8) would simply need a process for producing a review of what should be in that letter.


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15 Responses to Is Labour right to review the BoE mandate?

  1. Luis Enrique says:

    Would appreciate a bit more detail on 6. Are you talking monetary financing of govt expenditure?

    • Tony Yates says:

      Oh, no, just conventional deficit stimulus.

      • Luis Enrique says:

        oh – what does the BoE bring to the table, in that case?

      • Tony Yates says:

        The BoE gets to help decide the size of the stimulus needed to meet the flexible inflation target. It gets temporary pseudo control over fiscal policy for the time it needs it only. The govt thereby gets cover for the stimulus and therefore not punished by markets, and that ceases to become a political matter.

      • eurogate101 says:

        The old chestnut “markets punishing the government” is not still alive, is it?

        Hello, still anybody out there who has not heard about the fact that the BoE has fire power (aka £375bn QE), to punish anybody even thinking of becoming a “bond vigilante”.

        They will be blown away, the markets, if they even think about “punishing the government”.

      • mrkemail2 says:

        “Oh, no, just conventional deficit stimulus.”
        Why pay corporate welfare when you don’t need to?

      • mrkemail2 says:

        “The govt thereby gets cover for the stimulus and therefore not punished by markets, and that ceases to become a political matter.”
        It’s all political.
        There is no need to issue Gilts *at all*

  2. Dan Davies says:

    Would you not consider “delete 2%, insert 5% throughout” to be a review? Peoples’ QE doesn’t really need a new target, IMO – just a Chancellor’s letter confirming that this is an instrument available to meet the inflation target.

  3. Hmmm says:

    Is it really fair to call the 2013 event “a review” instead of “a document designed to ex post justify what the MPC were already doing and to lay the groundwork for forward guidance”.

    • Tony Yates says:

      Yes, I think it is. Read it. It’s terrific. A great piece of synthesis of state of the art monetary economics. I can’t help it if the MPC were already doing what that discipline recommended.

  4. Lyn Eynon says:

    By 2020, it will be 23 years since the 1997 Bank Act setting an inflation target and delegating powers to the MPC to achieve that. So this would be a once in a generation review of this approach, which does not seem too frequent given the radical changes in economic and financial conditions since then. The reviews that have occurred since 1997 have been more limited in scope.

    Review need not mean change. It’s possible that such a review could conclude that the existing framework is still the best available. But any conclusion should emerge out of an open and transparent review, not pre-judge it.

  5. Costas says:

    Hi Tony,
    Nice one: I would definitely want to see a detailed output gap series published in the BoE’s Inflation Report!

  6. eurogate101 says:

    “6) More radically, we could institute that when the floor to interest rate binds, or looks likely to, HMT and the BoE consider a discretionary fiscal stimulus jointly,… ”

    On the one hand, a good idea, as any potty Tory chancellor, now jumping up and down and going on about the excessive deficit, could be shut up by pointing out, that the BoE had told the Labour government that the DEFICIT HAD TO BE INCREASED.

    “Big deficit not our fault, the BoE told us to borrow that much,” that would make interesting politics.

    On the other hand, do we really want to give the BoE even more power to poke their noses into things they do not understand anything about?.

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