Tuesday , July 14 2020
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Will the UK go first?

Summary:
David Beckworth directed me to this piece: Officials in the UK Treasury are “probably” considering whether to change the Bank of England’s inflation-targeting mandate due to the massive economic shock imparted by the coronavirus crisis, according to a former minister.Lord Jim O’Neill, who was commercial secretary to the Treasury in 2015, wants the central bank to shift from its current target of keeping inflation at 2 per cent to targeting a steadily rising trend of nominal UK GDP growth instead. There are a few reasons why the UK might be the first to jump to NGDP targeting: 1. It’s NGDP figures are not greatly distorted by commodity price shocks. 2. It doesn’t have the deeply engrained hard money ideology of Europe and Japan. It bailed out on the gold

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David Beckworth directed me to this piece:

Officials in the UK Treasury are “probably” considering whether to change the Bank of England’s inflation-targeting mandate due to the massive economic shock imparted by the coronavirus crisis, according to a former minister.

Lord Jim O’Neill, who was commercial secretary to the Treasury in 2015, wants the central bank to shift from its current target of keeping inflation at 2 per cent to targeting a steadily rising trend of nominal UK GDP growth instead.

There are a few reasons why the UK might be the first to jump to NGDP targeting:

1. It’s NGDP figures are not greatly distorted by commodity price shocks.

2. It doesn’t have the deeply engrained hard money ideology of Europe and Japan. It bailed out on the gold standard relatively early (in 1931) and also bailed out on the EMS (in 1992).

3. Its government has a freer hand to change policy than in the US or Europe.

4. It’s currently ruled by pro-growth conservatives with little allegiance to hard money doctrines.

On the negative side, last time I looked they used a bizarre method of calculating NGDP (i.e. starting with RGDP), which led to significant delays and revisions. Given that we should be targeting expected NGDP 12 months forward, that’s not a big problem. But it’s likely to be perceived as a problem.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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