You might have seen our new paper Monetary Policy After The Crash: Lessons learned? call for the Bank of England’s 2% CPI Inflation mandate to be scrapped and replaced with a Nominal GDP target.
The report’s author Prof Anthony J. Evans persuasively sets out the problems with the Bank of England’s current mandate and explains why we need to adopt a new target and reform the Bank’s Open Market Operations.
It’s an idea with a strong intellectual pedigree. The Bank’s current Governor Mark Carney has flirted with the idea. Michael Woodford, considered by many to be the world’s leading monetary economist, also backs the proposal. Christina Romer, who served as Obama’s Chief Economic Adviser endorsed it. And Greg Mankiw, Dubya’s Chief Economic Adviser and author of the best selling economics textbook, has shown that Nominal GDP targeting performs well compared to other monetary policy rules. Other supporters include Nobel Laureate Bob Lucas, Cato’s George Selgin and perhaps even F.A Hayek.
Rather than explain the idea here (I’ve done that in CapX today). I thought I’d share what I thought were the best introductions to the idea out there.
Scott Sumner’s excellent blog The Money Illusion is probably the best place to start. We’ve published two papers by him The real problem was nominal and The Case for Nominal GDP Targeting. They’re both great papers but for my money, the former is a better introduction to the ideas of market monetarism, while the latter is better at highlighting the specific advantages of Nominal GDP over inflation targeting.
Our former Executive Director Sam Bowman’s Nominal GDP Targeting for Dummies is the best explanation of the ‘musical chairs’ model of why recessions happen.
And our former Head of Research Ben Southwood did an excellent job at skewering common misconceptions around monetary policy, including:
It’s bad if QE increases asset prices. And for that matter that QE only increased asset prices.
That raising interest rates will make house prices affordable
It’s also worth reading Anthony’s other Adam Smith Institute report Sound Money: An Austrian proposal for free banking, NGDP targets, and OMO reforms.
Enjoy!