Mark Carney and NGDPLPT

Mark Carney said:

"If yet further stimulus were required, the policy framework itself would likely have to be changed.¹⁹ For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP (Chart 4).

Bank of Canada research shows that, under normal circumstances, the gains from better exploiting the expectations channel through a history-dependent framework are likely to be modest, and may be further diluted if key conditions are not met.  Most notably, people must generally understand what the central bank is doing - an admittedly high bar.²⁰

However, when policy rates are stuck at the zero lower bound, there could be a more favourable case for NGDP targeting. The exceptional nature of the situation, and the magnitude of the gaps involved, could make such a policy more credible and easier to understand.²¹

Of course, the benefits of such a regime change would have to be weighed carefully against the effectiveness of other unconventional monetary policy measures under the proven, flexible inflation-targeting framework."

I may update this later. Busy days.

Comments

[Edeast]

So, the question becomes, long now, or wait till the summer?
Great expectations...

[Sina Motamedi]

Three cheers for a competent central bank!

[K]

The BoC really ought to make this change *now* before we run into the ZLB. Inflation should be rising now, and also we need time to condition inflation expectations to be countercyclical.

[Nick Rowe]

K: those are my thoughts too. NGDPLPT should not be thought of as just a last resort emergency measure. It would be better even if not at the ZLB. And the longer it is in place the more expectations would adjust, and the less likely would be the ZLB. And let's remember: The BoC kept inflation close to target, but it wasn't enough to prevent the recession.

[BPS]

But what about the fine print? The excerpt also said that for NGDPLPT to work, 'people must generally understand what the central bank is doing - an admittedly high bar'. The footnote goes on to state that [for NGDPLPT to work] 'people must be forward-looking, fully conversant with the implications of the regime and trust policy-makers to live up to their commitment'. Although there's no doubt economics professors and people who read blogs such as WCI for fun may meet this criteria, could we be certain this would be true for the rest of Canadian society?

[Andrew F]

Most Canadians don't really understand inflation targeting. Many people think inflation should be zero, and that besides the government is lying to us about inflation statistics.

[K]

BPS,

"The excerpt also said that for NGDPLPT to work, 'people must generally understand what the central bank is doing - an admittedly high bar'"

I don't think that's actually true. What if people started to believe that the BoC had their back on aggregate income? That's pretty easy to understand. People may not realize that it means implicitly countercyclical inflation expectations and they don't have to care. The empirical evidence anyways is that people have very little clue about the actual rate of inflation anyways, even now.

Also, if the BoC worries that they can't control peoples inflation expectations *away* from the ZLB, what on earth makes them think they can do it *at* the ZLB when they no longer have short rate policy at their disposal? It sounds to me like they are thinking of it as a hail Mary play. They are trying to talk it up for the fans, and they don't even want to *practice* it until the last play for fear that people will see that it doesn't work. That's a terrible strategy.

[OGT]

It seems Carney has a very reasonable skepticism of the expectations fairy. But an even healthier recognition that CB's need to be doing more to support demand.

[K]

OGT,

"But an even healthier recognition that CB's need to be doing more to support demand."

Then why has he kept the policy rate at 1% for over two years now? The 30-year bond is yielding 2.35%! That's not a yield that's consistent with a reasonable level of asymptotic NGDP growth.

It's great that they are looking at new ideas. But it looks to me like there's a real risk that - in classic central banker style - they are going to do *exactly* not quite enough to avoid a perpetual and disastrous Japan style liquidity trap. And Carney is leaving. What brave soul, willing to risk erring equally on either side of just right, is going to replace him?