John Cochrane, Ken Rogoff, cash-bans and the zero bound.

John Cochrane makes interesting points about the ubiquity of risk-free, zero-interest stores of value in a modern economy.

Such multitudes mean that it would be more complicated than at least I had earlier thought to generate a negative nominal interest rate, a reform urged by Miles Kimball most recently and others before him.

In economies with only cash serving this purpose, a negative nominal interest rate will not arise in private markets because investors can leave their money in cash and get a zero return, which dominates a negative number.  The solution – abolish cash (discussed and encouraged in the working paper by Ken Rogoff that prompted the Cochrane post).  Or tax it, by requiring currency to be stamped every so often (Buiter, and before that I think actually tried in Alberta, Canada?).

However, these solutions won’t work [at least not nearly as well] if there are other ways to achieve zero interest rates, using subway cards, gift cards, prepayment deals, whatever.  The ensuing discussion debates whether laws could be enacted to outlaw or tax these storage devices too.   Cochrane suggests that in the US, enacting those laws would be messy.

Originally, the idea was to be able to have a variable ‘tax’ so allow for variable negative nominal interest rates.  More stimulus needed?  Increase the tax and lower the nominal interest rate.  The alternative, having a large tax of say 5% and then varying negative rates down to that floor as the business cycle demanded, imposes a cost on the economy, identical to the cost of inflation (it erodes the value of stores of wealth).  But enacting a variable tax – variable so that it is tailored to the business cycle, the particular negative normal rate required in any month, that covers these many different kinds of zero interest rate storage devices strikes me as tricky, to say the least.

Doubtless if cash and close substitutes were abolished, or taxed, there would be pressure to evolve a replacement, swelling the issue of already-existing near substitutes.  [Speculative examples can be found in the comments to Cochrane’s post].

Recall the example of Kurdish controlled Iraq when NATO was enforcing the no-fly-zone, and before toppling Saddam.  Saddam tried to debase and then abolish the cash circulating in the Kurdish zone.  But even with no central bank, formal government, or even legal system, these notes held their value anyway.  That could have been because holders speculated that an eventual NATO sponsored government that toppled Saddam would reward them with an exchange for new ‘legal’ notes.  (A pretty brave forecast back then.)  Analogously, it is not hard to imagine holders of multifarious outlawed private stores of value speculating on a new government overturning the ‘ban on cash’, especially if the economy where to head back to a point where the zero bound did not seem like such a constraint, and the political cost of enforcing the ban did not have such an immediate benefit.

 

 

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Weale and McCafferty: the mystery of persistent hawk and doveishness

At the next Monetary Policy Committee vote, most are expecting Martin Weale and Ian McCafferty to vote for a 0.25pp rise in interest rates.  They have been voting for just this since August.

The curious thing, if you look at this through the lens of modern empirical macro, is that, if their vote stays this way, they will have kept that constant distance between their own preferred vote and the MPC’s preferred stance.  This is curious because, if you were to take a typical macro model and perturb it with an unwanted drop in interest rates, say by 0.25pp for 6 months, you would get quite a pronounced increase in inflation, and one that, once rates could be set freely again, would prompt you to tighten sharply to avoid inflation spiralling out of control.

And this is one way of looking at what is going on from the perspective of Weale and McCafferty, the mystery MPC hawks.  Each month, they choose their preferred interest rate and each month the majority confound them and set rates 0.25pp lower than they think appropriate, for six straight meetings.  [Six assuming they vote as I predict at the January MPC meeting].  So the puzzle is why each month they come back with the same suggested 0.25pp rise.  Because, after the first month’s mistaken interest rate vote [from the perspective of W&M], they ought to have put their heads together and said:  hang on, not only do we need rates 0.25pp tighter on account of us seeing the recovery’s heat for what it is, unlike our mistaken colleagues, but we need to tighten more in response to the interest rate mistake that our colleagues have injected.

An analogy.  Imagine MPC collectively steering a mini-bus around a corner.  W&M see the corner looming and vote for a slight tweak of the steering-wheel.  The others, who W&M must assume have not recently had their driving spectacle prescription updated, vote for driving straight ahead.  A few seconds later, W&M, fearing disaster, vote for a full-on yank of the wheel to keep the minibus on track……

There are three ways of reconciling W&M’s persistent, finely calibrated hawkery with policymaking that looks like how policymaking should be done.  One is that these kind of macro models have the macro-economy completely wrong.  Many would plump for that reason.  But these models are just the ones that W&M are using at the BoE to forecast inflation and inform their vote, and we don’t hear anything from them about how they see the world operating differently.

A second reason is that as news about the economy unfolds, it reveals that the economy is just a little bit cooler than W&M thought, enough to offset each month’s interest rate mistake that they would otherwise be correcting.  However, we also don’t hear anything from them about how they are slowly revising their view toward that of the majority.

A third reason is that, although required tightening for W&M does mount up each month, in just the way described above, W&M’s vote for a constant 0.25pp rise represents but the first step along a tightening plan that becomes more pronounced in its entirety as each month winds forward.  Yet, it would seem odd if this was the reason, because neither W&M indicate that this is what they would plan for rates.  It’s possible that they have conceived of these ever more aggressive plans, so the constant 0.25pp vote is coherent, but that they feel constrained by the convention of not talking explicitly about future interest rates.  But this would be somewhat odd too in these days where ‘forward guidance’ has made such talk permissible.

Another way to explain the W&M constant hawkery is that their vote is tactical.  Although they would prefer an ever more aggressive tightening, as the monetary policy mistake mounts up, they hope to convince some of the more hawkish doves to vote their way.  Better a compromise tightening than none at all, they might think.  In which case, as the monetary policy mistakes mount up, offering a mere 0.25pp rise [and being turned down by the hawkish doves] must get ever more miserable for them.  The first time they offer it, they are stating their preferred vote.  The second time, the 0.25pp rise is perhaps a little lower than they might want.  The third time, this 0.25pp rise looks meagre relative to the tightening required to make up for lost time.  And so on.  Such tactics might actually be in the realpolitik of MPC strategy.  But if this is what is going on, it would be entirely underhand.  The W&M votes have been defended as being just what they would wish for.

It’s somewhat unfair to pick on Weale and McCafferty in this way, as they are not the only MPC dissidents to behave like this.  Danny Blanchflower’s votes looked the same, only on the doveish side of MPC’s.  Andrew Sentance’s hawkery was similarly persistent.  And you can find the same behaviour if you go back to the MPC wars in the late 1990s/early 2000s when Messrs Wadhwani, Julius and Allsopp were heralding the ‘New Economy’, and arguing for lower interest rates [and signalling forecast dissent in the iconic ‘Table 6b’].

ECB QE. To mutualise or not?

Had a great lunch with an economist friend who alerted me to something that is obvious, but I had not thought of, and who then explained it wonderfully.  (And then returned to find Twitter full of it too.)  That there is a decision to be made about how ECB QE gets done that didn’t arise in the case of fiscal unions like the UK or the US.

Recall the Bank of England’s QE was done on the balance sheet of the Asset Purchase Facility, a special purpose vehicle – ironically enough given the role of these beauties in the storm of the financial crisis – from whose profits and losses the main balance sheet of the Bank of England was insulated.  In the case of the UK, the main thought experiment was that gilts would be bought at relatively low interest rates (high prices), pushing up the price still further [so perhaps a small capital gain if sold back to the private sector quickly], but that the portfolio would be sold off when interest rates had returned close to steady state levels, ie when prices had fallen.  This matters for the Eurozone too.  But the real issue is the possibility that the ECB buys the bonds, and they then become worth much less, either because people later worry more about default, or one of the peripheral governments actually does default, or exits, financially pretty much the same thing.

There is no single fiscal authority in the Eurozone to play the same role as the Treasury in the UK.  And, be sure that the collection of states there does not want to play this role anyway.

On the face of it there is a choice about whether the ECB chooses to put its own balance sheet at risk in the event that purchases of member state sovereign debt imply losses.  Or whether to delegate the task of purchase to member central banks.  In which case, it will be the member state governments that have to make good losses, and not the ECB, whose losses fall, in proportion to the shareholding, on member state governments.  That might sound like a distinction without a difference.  But not so.  The purchases most likely to imply losses are those of troubled ‘periphery’ sovereigns, Ireland, Portugal, Greece, Spain, Italy.  The delegated model of QE ensures that those losses fall where they are incurred.  The centralised, mutual model, redistributes losses somewhat away from the ‘periphery’ [in quotes because, come on, Spain and Italy hardly peripheral] towards the North.

A motive for operating the delegated way is of course to make it more likely that the Northern ECB voting representatives will accept it.  A bad reason why they would be more likely to accept it is that it implies, under certain myopic views of the world, a better outcome for their taxpayers.  Bad because they are not meant to be casting their vote on national grounds at all.  An acceptable reason for them to like it better is that it is an operation that is less ‘fiscal’ sounding than the mutualised model.  And would be therefore less subject to legal challenge (for example from the German constitutional court).  [Though, as I wrote before, there is an element of intellectual redundancy about trying to discern the monetary or fiscalness of a policy].

Note that the fiscal element comes without losses crystallising.  Just as the fiscal subsidy to banks that are too big to fail in the private sector comes about without them actually becoming insolvent, in the form of low, subsidised borrowing rates.

If you see QE as something precisely that’s meant to shift sovereign default risk off governments that can bear it and onto those that can, then the mutualised model is of course better.  But really, the decentralised version is the one that resembles the operation that the BoE or the Fed did.  How so, given that, legally, at least, the Fed and BoE operations were entirely centralised?  Well, relative to the counter-factual of no QE, QE there had no redistributive implications within the state.  Centralised QE in the Eurozone would.  Personally, I think that since pretty large redistributions are exactly what’s needed there, this moderate risk shuffling fiscal redistribution is desirable.  But it is what it is.

If the bad scenarios unfolded for peripheral sovereigns, there would no doubt be a terrible further convulsion in the financial system, and insuperable pressure for further action by the fiscal authorities themselves.  But I suppose that the hypothetical Teutonic master of the ECB universe might at least comfort himself with the thought that they had not authorised a small subsidy up front, and that there was at least a small chance that transfers would never happen, or be insufficient, and that an economically disastrous but morally satisfying outcome would be assured.

Chakrabortty’s working title ‘University Economics: the £9,000 lobotomy’

Pontus Rendahl, a rising star in macroeconomics at Cambridge, makes a revealing comment on my previous post about Aditya Chakrabortty’s idiotic and ill-informed Radio 4 program on economics.  I’ll quote it full here:

I was approached, not by BBC, but by a colleague herself approached by [the] BBC to participate in the program. At that time, the working title of the program was “University economics: the £9,000 lobotomy”. I suppose the title changed to give an air of unbiasedness, and partly to correct the tasteless analogy to tragic mistakes promoted by psychologists fifty so years ago.

Given that angle, I, and so did everyone else declined to participate as we knew that we would be edited to look like clowns. Or, if they couldn’t, leave us out due to “time constraints”.

This is a deeply dishonest piece.

Pontus was right in his forecast.  Danny Quah, one of the ‘mainstream’ voices [can’t help keeping that in quotes, as it’s such a stupid simplification of the stuff that gets taught and researched] was edited to seem somewhat clownish.  Explaining the rational choice model, the implication being that i) mainstreamers only use that model (wrong) and ii) those that do believe in its literal truth in each and every situation (also wrong).

What’s most revealing about Pontus’ remark is that it’s clear that Chakrabortty had already made his mind up about economics before he had listened to participants.  No doubt, at that point, he had the notion that nothing they were going to tell him would sway him from a view he’d already reached.   He already had his angle.  He just wanted fall guys to speak so they could be slotted into the rhetoric.  So, if my previous post gave the misleading impression that Chakrabortty was just incompetent or lazy in avoiding the quick Google that would have verified that the silly things the ‘orthodoxy’ challengers were saying to him were false, I take it back.  It’s clear that he might have known this stuff was probably rubbish, but had decided that the ends [letting everyone know studying economics was a waste of money] justified the means.

FYI Radio 4’s ‘Feedback’ have not deigned to respond to my complaint about Chakrabortty’s program.  Chakrabortty himself, who initially responded to my tweets by saying he was ‘too busy’, has seemingly been ‘too busy’ ever since.  Although he did retweet another’s comment that my post illustrated that ‘this is the problem’.  [The problem being what, exactly:   intolerance of what could have been a proper debate about economics and its teaching being undermined by spouting things that were false?]

And if you haven’t already seen it, read Karl Whelan’s post on the program.  It’s a great read, inspired by a saintly turn-the-other-cheek philosophy, and takes on some of the criticisms levelled at the economics profession constructively.

[Added later]

Postcript:  it should really have been “£27,000 lobotomy” anyway, since it takes 3 years of tuition fees to complete the process.

Peston’s Mr Markets, Krugman and Wren-Lewis’ Dr Pangloss

Robert Peston has been basking in the unusual distinction – for a journalist – of getting a pasting from Paul Krugman, and the somewhat less unusual distinction of criticism from Simon Wren Lewis.  Simon has coined a phrase to describe the sub-discipline of macro practiced by journalists:  ‘mediamacro’.  Part of this caricature is the idea that deficit stimulus is a bad thing, to be curtailed always, and always risks incurring the wrath of markets [aka the gendered ‘Mr Market’].

Both Krugman and Wren Lewis maintain that a country with its own independent central bank, pursuing its own monetary policy, does not need to worry about the effect of markets running from its bond markets, or demanding large risk premia in order not to.  Peston responds by saying that there are economists who believe such worries to be founded.

I am one of them.

I agree with Simon and PK that ‘mediamacro’ has recently, in the UK, missed an opportunity to correct an illiterate focus on deficit reduction that prevails in the debate between Labour and Conservative politicians.  For reasons best known to themselves, despite a few attempts by SWL, PK and myself and others to explain other ways of thinking, TV commentators have not bothered to put to politicians the notion that deficit spending is positively needed, right now, with the scope for monetary policy loosening severely constrained by the zero lower bound to interest rates, and the uncertain efficacy of further QE.  Is this argument too complicated to explain to viewers?  Are TV economic journalists ideological deficit hawks?

But, I don’t agree that one can take this as far as to suggest that monetarily independent countries are immune from problems of sovereign default.  Recent economic history serves up several examples.  None of them suggest that outright default is particularly likely for the UK.  But the risk is tangible enough to mean that there has to be some weighing of it against the desire for a persistent fiscal stimulus.

The point of conceptual dispute seems to be the proposition that because you can print your own currency, you will never be short of what you need to satisfy the claims of sovereign bond holders.  Ergo, you need never default.  Ergo, there need never be default risk premia in your bonds.  Ergo you can borrow as much as you like for as long as it takes to stimulate the economy back to full employment.

I don’t dispute that you can money-finance.  What I contend is that you would not want to.  And for that reason, it isn’t credible to promise it.  And so default risk premia will emerge if tax and spending plans are not arranged with sufficient clarity and discipline.  Why would you not want to pay your bondholders from the printing press?  Surely you are giving them what you agreed to when you signed the loan contract, right?  Because seigniorage finance is extremely inefficient, and it would require massive, and colossally damaging inflation to execute.  If it came to it, it would be far better, and far more popular to default on a few either rich or remote, institutional bondholders, than devastate the typically less well inflation-indexed poor.

So, in short, at some point, bondholders will demand a default-risk premium, because they know that, if borrowing gets completely out of hand, you will do the right thing for society and default on them.  At what point do such things become material?  Who knows.  Japan seems to be doing fine [in terms of default risk premia at least] at the moment, with gross debt more than twice its GDP.  So on that basis, the UK need not stress about deficit reduction over the lifetime of the next Parliament at least.  And ‘mediamacro’ ought instead to skewer the politicians on what they are going to do to assist the Bank of England in lifting the economy off the zero bound.  [And, while you are at it, ask them why they are not contemplating raising the Bank of England’s inflation target by at least 2 percentage points to reduce the risk of us becoming trapped there again].

 

Money, inflation and the zero bound. Krugman-Evans-Pritchard revisited.

Paul Krugman and Ambrose Evans-Pritchard have been jousting on the question of whether the central bank can create inflation at the zero bound or not.  I don’t think either of them have teased out all the subtleties, and, partly as a consequence, are talking somewhat at cross-purposes.  In particular, we need to clarify whether we are talking about a permanent or a temporary zero bound episode;  and whether we are talking about conventional open market operations or a helicopter drop.  And we also need to clarify whether we are conjecturing what happens in the real world, or just talking through the properties of a model.

Let’s talk about what happens in a standard, rational expectations, flex or sticky price macro model with standard ways of getting money into the models.

Do conventional open market operations that create more money have any effect at the zero lower bound if the ZLB incident is temporary?

No, not unless there is a corresponding expectation that at some future point in time, after the ZLB ceases to bind, that interest rates would be sufficiently lower than they would normally be, given the announced schedule for interest rates, ie sufficient to absorb the extra money and preserve money market equilibrium.  Without that expectation, the operation that created the money would have to be reversed later on.  Moreover, the creation of extra money at the ZLB is not even needed in order to lower expected future rates.  In the model, all that’s needed is to promise to lower them credibly.  At the point that they are lower, money market equilibrium will induce the central bank to create the extra money then through open market ops.

If the ZLB episode was permanent, then such operations would have no effect whatsoever.

What about helicopter drops?  In the standard framework for modelling money, both money and bonds are treated as economic liabilities of the public sector.  So helicopter drops at the ZLB don’t generate inflation, because they won’t be treated as wealth.  The typical person in the model simply looks forward to the time when the operation will have to be reversed, or made good with taxes.  And, at the ZLB, any non-pecuniary liquidity or transactional benefits from holding money are exhausted [that’s why in these models interest rates are zero].   In slightly more realistic versions of this model, where people face credit constraints, and money now may be useful despite there being higher taxes later to make up for it, the helicopter drop will work.  But in those situations so will tax reductions.  If institutional continuity is valuable, [though nothing in the model says this], such drops are are to be considered inferior to tax reductions since they achieve the same thing but at cost of institutional change.

Recently, Buiter has been arguing that we should model money as net wealth.  As conferring transactional/liquidity services (away from the zero bound) but as not redeemable like government bonds.  In such a world, helicoptering in money does confer wealth, and would generate spending and inflation, in which combination depending on what assumption was made about the stickiness of prices.  However, as I argued in previous posts here and here, while on realism grounds there may be a case for thinking about the irredeemability of money [as the new monetarists like Wright, Wallace and their collaborators would urge], as a modification of the standard model, which preserves the assumption that money simply confers liquidity and transactional benefits, it’s problematic.  Because it begs the question where those non-pecuniary benefits come from.  [One crude answer being:  from the authorities treating money as a liability].  I am left being prepared to concede that helicopter drops might generate inflation, but not that they would be beneficial, since they may lead to the steady destruction of that money altogether with all the attendant costs.

So, in some model worlds, helicopter drops work, and in others they don’t.  But it’s contentious whether they would ever be desirable.

Of course, so far we’ve only thrashed out what happens in models.  We can’t be sure what would happen in the real world.  Perhaps this caveat is implicit in the confident sounding exchange between Krugman and Evans-Pritchard.  But, even if it is, it’s worth repeating.  The monetary models of OMOs and helicopter drops we have are very rudimentary, give conflicting answers, and may be misleading on account of other assumptions made in their construction.

This leaves me here:  in the most plausible theoretical models, helicopter drops either don’t work, or work no better than conventional fiscal policy.  As a practical matter, they are to be feared as they risk being associated with monetary and fiscal disorder;  and are anyway unnecessary for the US or UK or EZ where there is ample fiscal capacity to do more of the usual kind of stimulus.  Such policies may be infeasible because of politics.  But helicopter drops are hardly likely to succeed on those grounds either.  Imagine the reaction of the Republican controlled Congress or of the Germans to a helicopter drop.

The BoE’s Warsh Report on transparency around monetary and financial policy

What a day for BoE watchers, and particularly for ex-BoE people like myself.  At Treasury Committee in March this year, perhaps prompted by media coverage [eg this and this by Mike Bird, and this by Chris Giles] of the revelation that MPC were routinely destroying tape recordings of their meetings, [and at least Granger caused by my blog here], Andrew Tyrie ambushed Mark Carney at the end of his hearing on the topic, and the Bank subsequently promised to review the way it operated.

That review, by Kevin Warsh, was published today, along with the BoE’s response.  The Bank is to publish transcripts of ‘Day 2’ MPC meetings, plus some staff briefing for MPC, after an 8 year lag.  Financial Policy Committee [FPC] and Prudential Regulatory Authority [PRA] Board meetings won’t be subject to the same degree of transparency, yet.

Some reactions.

My first reaction is:  blimey, how much things have changed since Carney took over.    Almost all the Executive Team and above during my 20 years there were vigorously and instinctively against further transparency.  Many of us who worked on transparency issues inside the BoE were subjected to a dispiriting ‘Commission, encourage, dilute, squash, sideline’ cycle during that time.  So changes like this, [and, the improved transparency over the forecast already introduced this year] are a startling break from the past.  So many of the reforms  that the wise birds of the Bank, availed of deeper insights into the political economy of monetary policy, deemed impossible, are now in place.

Digging into the detail a bit…

Transcripts [of Day 2] will be released with a reasonable lag of 8 years.  That sounds like a long time.  But many internal members arriving on the Committee as Executive Director might find themselves in gainful employment on MPC more than 8 years later.  So this is short enough for contributors to realise that they might be confronted with things they said and did while still on the job later.

A distinction is drawn between Day 1 and Day 2 of MPC meetings.  Day 1 is supposed to be when the thinking aloud happens, and MPC get to try out arguments without fear of being skewered either by their colleagues or history.  Not transcribing these discussions is an attempt to preserve that.  [Though the skewering by colleagues, in the constant low-level warfare that is MPC, will continue].

Day 2 is described as ‘decisional’ by Warsh, [an adjective unlikely to be in the Economist style guide].  The implication being that by then everyone will have made their mind up, and will probably be speaking from pre-prepared written statements.

In support of the recommendation not to record, transcribe and release Day 1 deliberations, Warsh makes reference to the academic research on the lower quality of more public deliberations.  This research is intriguing.  But dispiriting.  Monetary policymakers are middle-aged, high-IQ, highly confident, already successful individuals, not 25-year-old interns, who one could understand might need encouraging out of their shells.  But yet the suggestion is thta even those at the top of central banking are incapacitated by this human frailty.  Responding to that, Warsh suggests we should trade off transparency against functionality.

In other spheres, we don’t arrive at the same point in the trade-off.  Parliamentary transcripts are taken and released.  Court transcripts are produced and released.  The nation is in fact replete with important activities requiring debate and argument testing, yet which are transcribed and published.  The presumption is that the people selected for these important jobs have the capacity to debate and think on their feet, and are sufficiently self-confident and able to do it knowing that what they say will eventually be released, and must be released for the state’s legitimacy to be nurtured.  We would not often consider further constraints on publication on grounds that the top people of the state need their debating skills nurtured by privacy.  Why is the argument so much more compelling for  monetary policy?  I hope that in time this decision will be reconsidered.

Briefing related to the policy decisions is also to be released with an 8 year lag.  This is going to raise the stakes for MPC members seeking to go against staff advice;  and for staff members writing briefing that they know will contradict positions held by MPC.  It is going to strain the ‘constitutional’ position of the internal members who also are in the chain of command for staff working on MPC related briefing material.

Staff members will have to be braver, putting aside the worry about risking their careers with advice that goes against the views of their current or potential future employers.  And/or internal members are going to have to try to separate out their roles as performance managers in the Bank, and as individuals voting on the MPC.

Behaviour on both sides was routinely tainted when I was there, even without these new pressures. [I include myself as culpable too.]  Something concrete will have to change in internal processes to make sure that things change under the new regime.  From what I know of Carney, he is every bit as forceful in using what resources he can to get his way as his predecessors.  And a way will have to be found to prevent the interesting and contentious stuff being channelled out of the ‘official’ briefing to be published, and into the depths of the BoE’s email servers, leaving only the ex-post sanitized stuff for posterity to look at.

These changes edge us a tiny bit closer towards having a staff forecast.  Although we will only see the MPC members’ Inflation Forecast, we will eventually get to see what the staff were advising about aspects of it, and therefore be able to infer something about what they would have forecast.  All analysts working on monetary policy in the BoE have their views about policy solicited and discussed in working-level meetings.  The closer people are to the forecast, the more those people have fully articulated alternative forecasts of their own.

Should the BoE go all the way and pull what lies there already into a staff view?  I’m not sure.  On the one hand, there is expertise there that is not being exploited, or, if it is, revealed.  On the other, we have to remember the ultimate objective here, which is to get MPC members themselves to inform their policy vote.  In an economy where it takes time for policy to have its full effect, one has to act ahead of time, so this necessarily means MPC members forming their own forecast.  Question is, is that better done as currently, or via, or in addition to, a staff forecast?

A staff forecast might act as a disciplining device.  It would be harder for the great tradition of forecast reverse-engineering to survive.  (That’s where MPC members used to decide on economic judgements [eg participation, productivity] based on whether it would tweak the forecast towards the policy vote they had already decided on).  But it might also force the staff in on itself, in an attempt to maintain the robustness and coherence of its view, and leave the MPC feeling that it wanted more of its ‘own’ resources, to construct its own forecast.

The Bank chose the 8 year publication delay itself, a fact noted neutrally by Kevin Warsh in his report ‘Ultimately the Bank will choose the delay’.   Well, yes, it will, in the absence of its boss, the Treasury doing that job for it.  I don’t think it’s for the Bank to choose how it itself is held to account.  The Bank chose to employ Kevin Warsh to conduct this review, but that doesn’t seem appropriate either.  The Bank might have expert insight to comment on a decision made by others, but shouldn’t be taking this decision itself.  We are fortunate that the BoE is under such enlightened leadership in these (governance) respects.  And mostly seems to have taken the decisions an impartial observer would have taken.  But the current Governor will be back in Canada in 3.5 years.

The Bank has chosen to continue to make use of a blanket Freedom of Information exemption on monetary policy matters, which I infer from Chris Giles’ FT story  on the release of the Warsh Report.  This is wholly inappropriate in my view.  Old papers on monetary policy are not matters of national security or institutional integrity.  (Though I am glad that my 10 pager from circa 2005 on how the miracle of better risk-management will affect the equilibrium risk free rate is safe).  The Bank can surely come up with a more nuanced use of the FOI Act than it has at present, and perhaps should be forced to.  That catch-all device does not now sit well with the new transparency measures giving further access to specific kinds of material around the forecast and monetary policy process.  I suggest that Treasury Committee looks into find a way to circumscribe the BoE’s use of this FOI exemption.

Warsh excuses FPC from the same transparency reform recommendations as MPC on the grounds that it doesn’t yet know how to use its tools or precisely what it is doing!  Quite extraordinary to read that.  I don’t disagree with his assessment.  (Though I am not sure it’s consistent with how the FPC describes its own progress).   But I think one could argue that this makes scrutiny all the more valuable.  Mere handle-turning in a settled regime involves lower stakes.  But foundational decisions about what the FPC should be doing and what they expect their instruments to be used for are more important.  All the more crucial that we can see, later, that these tasks were being performed well.  Or, if not, that FPC’s successors can use transcripts to figure out why not.

The Warsh Review also excuses the Prudential Regulatory Authority Board meetings from the same transparency standards [as MPC].  One argument, perfectly reasonable, is that those meetings are about individual institutions, and cover information of such commercial import that even an 8 year lag might be insufficient.  Another argument given is that the PRA board operates by ‘consensus’.  What does that mean exactly?  It could mean ‘this committee chooses to debate things to such a degree that eventually all but the single, indisputably correct view falls away and everyone agrees with it’ [unlike with MPC].  Not a very plausible description is it?  What’s so different about the matters that the PRA board deliberates on that unanimity can be reached?  Another interpretation leaves the argument a tautology:  ‘For reasons not specified, the Board chooses not to register dissenting views.  Therefore, dissenting views in the form of votes should not be registered.’

However, these points should not detract from the fact that today is a triumph for the BoE.   Lacking someone to tell it precisely what to do, the BoE decided for itself – albeit under a little pressure from the media and Treasury Committee – to introduce greater scrutiny into the operation of monetary policy.   Good for them.  Even if Carney achieves nothing else, these transparency reforms, and those already introduced around the forecast, will be a commendable legacy.