This comes from a speech Mark Carney gave yesterday, talking about Central Bank Independence:
In no small part due to my predecessors, particularly Lord King, the stagflationary threats in the UK were tamed by a new regime for monetary stability that was both democratically accountable and highly effective.
Clear remits. Parliamentary accountability. Sound governance. Independent, transparent and effective policy-making. These were the great successes of the time and their value endures today.
But these innovations didn't deliver lasting macroeconomic stability. Far from it. Price stability was no guarantee of financial stability. An initially healthy focus became a dangerous distraction.Three thoughts.
First, the arrangement only worked during a credit boom that lasted from 1998 to 2008. That's not exactly an indication of success.
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This is indeed a welcome development. Straight from the horse’s mouth! Better late than never.
What now? I think this speech by the Governor marks an important change of attitude. It involves the recognition of morality, and that in the absence of good management, markets are prone to excess and abuse. There will follow a debate on the nature of good management and the moral course of action.
All of which I hope will lead to a recognition of what sound economic commentators, like yourself Richard, have been saying for a long time. Please keep up the good work!
Simply the BoE are being asked, by George Osborne, to achieve the impossible. Namely the meeting of an inflation target of 2% by varying interest rates.
“I hereby re-confirm the inflation target as 2 per cent as measured by the 12-month increase in the Consumer Prices Index (CPI). The inflation target of 2 per cent applies at all times. This reflects the primacy of price stability and the inflation target in the UK monetary policy framework. Price stability represents an essential pre-requisite for economic prosperity. The Government’s commitment to medium-term price stability remains absolute. The inflation target is symmetric: deviations below the target are treated in the same way as deviations above the target…….”
http://www.bankofengland.co.uk/monetarypolicy/Documents/pdf/chancellorletter180315.pdf
Stiglitz lists the following as 6 failed assumptions of monetary macroeconomics (pre-GFC):
“Maintaining price stability is necessary and almost sufficient for growth and stability
(Therefore) It is not the role of the Fed to ensure stability of asset prices
Markets, by themselves, are efficient, self-correcting
Can therefore rely on self-regulation
In particular, there cannot be bubbles
Just a little froth in the housing market
Even if there might be a bubble, couldn’t be sure, until after it breaks
And in any case, the interest rate is a blunt instrument
Using it to break bubble will distort economy and have other adverse side effects
Less expensive to clean up a problem after bubble breaks
Implication: do nothing”
He goes on to say that:
“Inflation targeting risks shifting attention away from firstâ€order concerns”
http://policydialogue.org/files/publications/Rethinking_Macroeconomics.pdf
That pretty much covers it I suppose. The BofE is actually pretty slow out of the blocks on this one.
The Reserve Bank of Australia has been on record for at least 2 years in saying that exchange rates and asset-price bubbles are key considerations in deciding official interest rates.
The old Taylor Rule style of inflation targeting is pretty much dead – and not before time.
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