This latest report from UK think tank the Adam Smith Institute explains why the UK should adopt a NGDP target for monetary policy.
The ASI’s latest paper, by Scott Sumner of the Mercatus Center at George Mason University, explains why the UK should adopt an NGDP target for monetary policy: The current economic crisis, caused by the response to Covid-19, has led to a historic drop in economic activity and increase in unemployment. In order to avoid a long-lasting recession, it is necessary to reconsider the current monetary policy of targeting inflation. Inflation targeting is dependent on flawed metrics, which are easily biased by non-monetary factors such as supply shocks and sales taxes, which do not require a monetary response. During this crisis, it risks excessively tight monetary policy. A nominal GDP target can address the dual concerns of macroeconomic policy, inflation and jobs, with a single policy target. It would allow for a looser, expansionary monetary policy during the current recession and help reduce the impact on jobs and growth in the longer run. Had central banks pursued nominal GDP targeting during 2008, it is quite likely that both the financial crisis and the recession would have been much milder. In order to minimise the damage of the current recession, the Government should provide the Bank of England’s monetary policy committee a remit to: target a nominal GDP growth of around 4% per annum over the coming years; use “level targeting,” which means making up for past undershoots or overshoots — in practice, this would mean compensating for lower nominal GDP growth in 2020 by targeting a higher nominal GDP growth rate in 2021; and have the central bank target market expectations of nominal GDP growth.Read Full Report
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