JM writes in the FT about things to be considered under the rubric of a mandate review, conducted for him by Danny Blanchflower, John Hall, Simon Wren Lewis and Adam Posen. He writes that ‘operational independence’ is ‘sacrosanct’, which is an encouraging form of words given his earlier views that the Bank of England should be taken back under democratic control, and the view implicit in supporting such things as ‘Quantitative Easing for the People’ that BoE crisis policies had been working against ‘the people’.
A few remarks about some of the details that JM explains will be considered, which I have blogged about before.
First, raising the inflation target. JM points out that the target could in principle be set higher or lower, but no one would support lowering it after the experience at the zero bound. Raising it is one way to reduce the chance of such episodes in the future, and I would support that. But not any time soon. Only once we have shown convincingly that we can escape the zero bound and hit the current target. And, strictly speaking, this is not something that is currently formally encoded in the mandate, the actual number attached to the inflation target being something that is confirmed by letter each year at the time of the Mansion House speeches.
Second, buying private sector assets via quantitative easing. This could be a matter for a mandate review, to the extent that currently the BoE’s power to do this rests on discretionary exchanges of letters specifying permitted assets and the limits to QE purchases. So one could imagine formalising this to eliminate the need for that discretion. Another aspect that might be attended to is to make it clear that the decisions about what assets are bought are a matter for the whole MPC, whereas during the crisis the BoE executive reserved for itself this decision, leaving only the decision about ‘how much’ for MPC votes. This, in my view, had its origin in the analysis that it was only the quantity of money created that was important, not what it was spent on, an analysis I did and do not share. Exactly what assets are bought at a particular point in time should not be proscribed in the mandate, and ought to be left an operational decision for MPC.
Regional MPC members. This would be a retrograde step. Multiple committee places should be there to allow for controversies to play out about the appropriate diagnosis of the aggregate economic state, and the aggregate monetary policy. And they should not be there to set up a tug of war between regional members trying to tilt interest rate decisions towards their own regions. Data collection [and adding up!] is the way to ensure appropriate regionally constituted aggregates. And Parliamentary accountability mechanisms can be used ex post to ensure that monetary policy is set strictly to meet aggregate conditions and not tilted in favour of any region. Regional data is mostly secondary in the monetary policy process, the main exception being that regional mis-match in labour or product markets can cause frictions at the aggregate level [for example raising the natural rate of unemployment]. Those who point to the Fed as an example to follow are mistaken. The regional set up there is an anachronism made such by the enormous changes in regional activity in the US now. And the regionalism there is not really reagionalism anyway. The multiple local Feds, in my view, mostly serve as a way to generate competing talent pools that produce potential FOMC members.
Formalising the trade-off between inflation and other things. This is a reference to the explicitness of the ‘dual mandate’ that binds the Fed. I don’t think that there is a case for change here. First, the 2013 HMT review made it clear that the BoE should be a flexible inflation targeter, and in fact accepted that it always had been [as the BoE usually described itself]. This mandates it to give the appropriate weight to stabilising real things, as well as inflation. Second, formalising a real stability mandate is tricky, theoretically. Optimal policy might well involve stabilising nominal wages, as much as prices; and on the real side involve important quantities like the real exchange rate, and could weight differently the different components of GDP, as well as including deviations of unemployment from the natural rate.
I’d also want to head off the inference anyone might draw from the mandate review that it was adopting an inappropriate weight that has led to the extended inflation target undershoot [which JM refers to as context for the review]. On that undershoot, a few points. First, inflation is inherently hard to control, so protracted over and undershoots are to be expected. Second, we should remember the protracted overshoot in the early phase of the crisis. Third, I doubt there is a convincing case for concluding that monetary policy is too tight and second-guessing the MPC’s analysis over the last few years. Fourth, if there is anything suboptimal about the undershoot, its root is most likely to lie in the difficulties of stimulating the economy via moneary policies at the zero bound, and the insistence of the fiscal agent on relatively tight fiscal policy.
NGDP targeting. I’ve blogged a lot about this before, and haven’t the heart to repeat it here. Very briefly. Growth targets would not make a whole lot of difference. Levels targets rely on being a rational expectations nutcase, and even then would probably be incredible.
A final comment. The mandate review perhaps springs from a general sense that the policy decisions made by the Bank under its mandate are not subjected to enough scrutiny. In that respect the debate that the reivew will prompt is to be welcomed. But it is worth thinking about whether the accountability framework for the Bank does its job well enough. The Bank itself is so formidably resourced that it can easily bat off comments at Press Conferences, or even energetic questions by MPs on the TC. And the occasional policy reviews commissioned by the Bank’s Court may well not be enough. What could be done to improve this? A lot is at stake here, for, inflation is ultimately always and everywhere a phenomenon tied down by political consensus. The outcomes hoped for in a BoE mandate, even if already written adequately [I think it is already written adequately], may be frustrated if insufficient policy scrutiny undermines a consensus that the BoE is using its delegated powers for the common good.