More On the English Hike
I had initially written this as an update to the post below but then I began digging (just a bit) and I thought it deserved mention above the fold so to speak. First off, Felix Salmon (The Economonitor) also reports on the raise by the BoE which is now 'official' by the way. Felix notes my pots and also quotes the Economist on the effect of immigration on potential output (that is the level of growth an economy can sustain without building up inflation). More importantly Felix concludes his post asking about inflation targeting vs. monetary targets in central bank policies.
The Economist concludes that the BoE might revert to monetarism, especially now that M4 growth, at 14.5%, is at a 16-year high. Maybe inflation targeting doesn't make things any easier for central banks after all.
Interestingly, Mark Thoma also has someting on this today as Trichet (the head of the ECB) recently has argued for the use of monetary targets in conducting monetary policy. In the light of lingering vigilance I guess this makes sense since inflation is below the ECB's target but the monetary indicators still indicate excess liquidity. Most notably, Mark also includes links to academic papers and articles which treat this question.
- Bernanke on Interest Rates, Monetary Aggregates, and How Monetary Policy Impacts the Economy
- Using Monetary Aggregates to Overcome Model and Data Uncertainty
- The Declining Role of Money in Monetary Policy
- The Use of Monetary Aggregates as a Guide to Policy
- Will the Fed Abandon Open Market Operations?
- Did Monetary Policy Change Permanently in 1979?
- Greenspan Sums It Up
- Will the ECB Abandon Its Monetarist Tradition?
The FT's Lex column also reports on the hike in England (walled for non-subscribers)
Unanimity does not always mean consistency. In June, 40 out of 40 economists surveyed by Bloomberg correctly predicted UK interest rates would remain on hold. Before Thursday’s Monetary Policy Committee meeting, 60 out of 60 correctly predicted a 25 basis point rise to 5 per cent. Investors are much more hawkish too: the yield implied by July 2007 short sterling contracts has risen by about 90 basis points to 5.42 per cent over this period.
What explains this? Not the turnover in the MPC’s membership: overall the balance between identifiable hawks and doves has not changed much. Nor rising house prices: the MPC watches the property market but does not try to manage it. After its shock August rate rise, the MPC claimed statistical revisions had changed its view of slack in the economy; yet Thursday’s statement of “limited” spare capacity is not wildly different from the sceptical tone it struck early this year towards Treasury claims of a big output gap.