Wednesday, 22 July 2009

Is the Bank of England targeting nominal GDP?

How interesting. The Bank of England, whose notional target is a 2% inflation rate (CPI), is now looking at cash GDP in deciding its quantitative easing policy.

That's according to Stephanie Flanders, who has an intelligent writeup of the Bank's considerations in deciding whether to print another £25 billion to purchase government and corporate bonds.

Scott Sumner will surely be pleased to hear it: he has been advocating for a while that central banks should target nominal GDP. What's more, they are looking not at the rate of change, but at:
...the Bank's expected path for cash GDP in the next year or two...
implying that the target is an absolute level, so if there's a shortfall this year they may even try to make it up next year.

Now there's some way to go from using NGDP as one of the considerations in guiding this month's policy, to setting a formal rising path at 5% a year, trading a futures index and giving up inflation targets altogether. But this is an intriguing step.

What with the Bank of Sweden imposing negative interest rates on reserves, and the Bank of England targeting NGDP, Scott Sumner might turn out to be a prophet of 21st century monetary policy. After all, prophets often start out as cranks...

Update: The Onion reports a major new development in monetary policy.

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