King Stands by Inflation Targeting

I don’t get this argument from Bank of England governor Mervyn King:

The governor of the Bank of England… Sir Mervyn King … dismissed suggestions made by his designated successor, Mark Carney, now governor of the Bank of Canada, for the Bank to ease monetary policy further by abandoning its inflation target if meaningful growth continues to elude the UK. Mr Carney succeeds him at the start of July. …

With the UK government pursuing fiscal consolidation, monetary policy has been the mainstay of policy makers’ strategy to boost economic output… But the governor, speaking in Belfast, warned against over-reliance on monetary easing. “In many countries, including the UK, fiscal policy is constrained by the size of government indebtedness, and monetary policy has come to be seen as the only game in town,” Sir Mervyn said. “Relying on monetary policy alone, however, is not a panacea.”

That says nothing at all about whether monetary policy should be easier, tighter, or is currently just right. Actually, he does offer this:

The governor suggested the government should introduce supply-side reforms to support the UK’s shift towards higher exports and lower imports.

“It cannot be for a central bank to design a programme of such supply initiatives, but in economic terms there has never been a better time for supply-side reform,” he said.

He is suggesting that the UK’s problems are entirely on the supply-side, and that further demand side measures cannot help (e.g. through further monetary easing). Bluntly, I think that’s wrong. I have my doubts about nominal GDP targeting as the solution to our economic problems, but that doesn’t imply that the current policy approach is optimal, or that deviating from a strict inflation target in the short-run (or the path to the target) cannot help.

This piece is cross-posted from Economist’s View with permission.