How Bank of England heavyweights criticised their own policy, 20 years early

It's taken the Bank of England four years to get inflation back to target - but many think the Monetary Policy Committee is looking in the wrong place entirely.

In fact, the committee's own members seem to have agreed.

A comment at the market monetarist blog Britmouse documents how members of the Bank of England's Monetary Policy Committee have endorsed a policy of nominal GDP targeting.

NGDP targeting would see the Bank target the path of NGDP growth - the Bank's role would be to stabilise demand growth, rather than to stabilise inflation.

City A.M. editor Allister Heath discussed the posibility of Bank governor Mark Carney introducing NGDP targeting when he started work at Threadneedle Street in July.

Martin Weale, current monetary policy committee member, 1994 (co-authored with Chris Doyle)

An alternative approach is to target a nominal aggregate which is some function of both output and the price level. Higher prices may be a mechanism which allows an economy to recover from a recession: it is sensible to adopt a target which makes this possible.

It is then difficult to see why inflation is a more sensible target than money GDP.

Doyle C, Weale M. Do We Really Want an Independent Central Bank? Oxford Review of Economic Policy. 1994;10(3):61–77.

Sir Mervyn King, former governor, 1994

Of the alternative intermediate targets that have been suggested, the most serious candidate is a nominal income or GDP target. This has an impeccable pedigree with support from James Meade, Sir Samuel Brittan and Charles Bean in the UK, and Robert Hall and Greg Mankiw in the US. Nominal income rules were proposed to reduce the volatility of real output in the face of shocks to the economy.

King M. Monetary Policy in the UK. Fiscal Studies. 1994;15(3):109–28.

Charles Goodhart, former monetary policy committee member, 1994

There are several reasons for advocating a nominal income, rather than a price inflation target (Meade, 1994). The former gives some weight to deviations of output from its ‘equilibrium’. Also, policy makers should not react to an adverse supply shock (e.g. the oil shocks of 1973 and 1979) by further deflating the economy. In practice, the latter point is largely met in the small print, or qualifications, to the inflation targets, whereby indirect tax increases, severe terms of trade shocks, energy and food price increases, and the own effects of interest rate increases on the RPI may be disregarded for the purpose of such targetry.

Goodhart CAE. What should central banks do? What should be their macroeconomic objectives and operations? The Economic Journal. 1994;1424–36.

Charlie Bean, current deputy governor for monetary policy, 1983

a policy of targeting nominal income produces an optimal response to demand shocks and to productivity shocks if labour supply is inelastic. Even if labour supply is elastic nominal income targets will still produce a better response to productivity shocks than monetary targets if the price elasticity of aggregate demand is less than unity. Growth rules are less attractive than targets for the level of nominal income

Bean CR. Targeting nominal income: an appraisal. The Economic Journal. 1983;806–19.