Think the Fed has been too timid? Check out Britain and Japan.

December 13, 2012

Over the past few years, Ben Bernanke and the Federal Reserve have taken a number of unprecedented steps to lift the U.S. economy out of its malaise. But there are some economists who still think the Fed could go much, much further. And they may have finally found a willing audience over in England's central bank.


No NGDP level targeting? McKayla is not impressed.

Let's recap: On Wednesday, the Federal Reserve announced that it would keep interest rates low at least until unemployment fell to 6.5 percent or inflation looked likely to rise above 2.5 percent. The Fed was basically saying that it wouldn't abandon its stimulus measures until the economy was on a firm path to recovery.

But economist Scott Sumner, who has often criticized the Fed for being too timid, was only slightly impressed with Wednesday's announcement:

I think it’s huge in an intellectual sense, but not in a policy sense.  The Fed had already committed to keep money easy well into the recovery.  This makes that promise more explicit.  Which is good.  But it’s still a long way from level targeting.  A Japanese-style zero percent NGDP growth path over the next 2 decades is fully consistent with this commitment.

To unpack this a bit: Sumner is an advocate of NGDP level targeting. The idea is that the U.S. economy should have been growing at a roughly 5 percent pace in nominal terms since 2007—"nominal" here means some combination of real growth and inflation. We've fallen well short.

Under NGDP targeting, Bernanke would announce that he'll do whatever it takes, including buying up assets and injecting money into the economy, until the U.S. economy has caught up to trend. That would likely entail much more stimulus — and potentially a much higher tolerance for inflation. (You can read our handy primer on NGDP targeting.)

So far, Bernanke has demurred from taking this step. But the idea may get a hearing over in Britain. Mark Carney, the new Bank of England governor imported from Canada, has been talking up NGDP targeting of late:

Addressing the Chartered Financial Analyst Society in Toronto, Mr Carney said that in major slumps: “To achieve a better path for the economy over time, a central bank may need to commit credibly to maintaining highly accommodative policy even after the economy and, potentially, inflation picks up. ... 

He added: “If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP level target could in many respects be more powerful than employing thresholds under flexible inflation targeting.”

Meanwhile, the U.K. Treasury sounds willing to entertain Carney's ideas about monetary policy. That doesn't mean NGDP targeting is definitely coming to Britain, but it's at least being discussed. Sumner, for one, is excited about the possibilities.

There's also Japan to consider. The country has been flailing for years with dismal growth and has just officially dipped back into yet another recession. The Liberal Democratic Party, which is poised to win the parliamentary elections on Sunday, has said it might require the central bank adopt a 3 percent nominal growth target. (Inflation is even more controversial in Japan, thanks to the high number of retirees living on fixed pensions, but at this point officials seem willing to try anything to kick-start growth.)

So for those who think Bernanke's been far too timid, keep an eye on Britain and Japan.

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Ezra Klein · December 13, 2012