Howard Davies - The Chancellors

The Bank of England argues that the UK inflation target regime, with its focus on inflation at a two-year time horizon, allows it the flexibility to look through temporary overshoots, as it did in 2010. It argues furthermore that since 2010 there has been no undershoot of the target, as there has been in the US and the Eurozone. But, as Wren-Lewis points out, interest rates have been at or close to their lower bound for some time, and the policy tool then available, QE, ‘is just too unreliable compared to interest rates or fiscal policy’.

Ed Balls and colleagues at Harvard Business School have argued that in these circumstances a closer nexus between monetary and fiscal policies is required. They recommend that the Governor should be mandated to write to the Chancellor suggesting the scale of fiscal stimulus they think is needed when interest rates are at their lower bound. 21Support for that approach came from Olivier Blanchard, the former Chief Economist of the IMF, who argues that if interest rates remain lower than the growth rate, and if monetary policy is constrained by the zero lower bound, it makes sense to run fiscal deficits to sustain demand, even if this leads to a further increase in debt. 22

So far, neither the Bank of England itself nor the Treasury has shown any signs of being interested in amending the policy framework in this way. If the post-Covid recovery is again sluggish, as the post-GFC recovery was, the question of monetary and fiscal policy coordination will rise up the agenda, but the Bank of England will certainly resist any change which puts its monetary policy independence at risk.

1 1. Interview with the author, August 2021.

2 2. ECB’s governing council approves its new monetary policy strategy. 8 July 2021. https://publications.banque-france.fr/sites/default/files/medias/documents/2021-07-08_-_ecbs_governing_council_approves_its_new_monetary_policy_strategy.pdf.

3 3. Quoted in Camilla Hodgson, Bank of England given new mandate to buy ‘green’ bonds. Financial Times, 3 March 2021. https://www.ft.com/content/f436d69b-2bf0-48cd-bb34-644856fba17f.

4 4. John Cochrane, Central banks and climate: A case of mission creep. Hoover Institution, 13 November 2020. https://www.hoover.org/research/central-banks-and-climate-case-mission-creep.

5 5. Mervyn King and Dan Katz, Central banks are risking their independence. Bloomberg Opinion. 23 August 2021. https://www.bloomberg.com/opinion/articles/2021-08-23/central-banks-are-risking-their-independence-mervyn-king-dan-katz.

6 6. Interview with the author, March 2021.

7 7. Daniel Harari and Matthew Ward, Quantitative easing. House of Commons Library. CDP 2016/0166, 14 September 2016. https://researchbriefings.files.parliament.uk/documents/CDP-2016-0166/CDP-2016-0166.pdf.

8 8. Quoted in James Dorn, Maintaining distance between monetary and fiscal policy. Cato Institute, 18 November 2020. https://www.cato.org/publications/pandemics-policy/maintaining-distance-between-monetary-fiscal-policy#.

9 9. HM Treasury and the Bank of England announce temporary extension of Ways and Means facility. 9 April 2020. https://www.bankofengland.co.uk/news/2020/april/hmt-and-boe-announce-temporary-extension-to-ways-and-means-facility.

10 10. Chris Papadopoullos, The Bank of England nearly financed the deficit. Does it matter? OMFIF, 21 January 2020. https://www.omfif.org/2021/01/the-bank-of-england-nearly-financed-the-deficit-does-it-matter/.

11 11. Andrew Bailey, Bank of England is not doing ‘monetary financing’. Financial Times, 5 April 2020. https://www.ft.com/content/3a33c7fe-75a6-11ea-95fe-fcd274e920ca.

12 12. Tommy Stubbington and Chris Giles, Investors sceptical over Bank of England’s QE programme. Financial Times, 5 January 2021. https://www.ft.com/content/f92b6c67-15ef-460f-8655-e458f2fe2487.

13 13. Andy Haldane, What has central bank independence ever done for us? UCL Economists’ Society Economics Conference, 28 November 2020. https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/what-has-central-bank-independence-ever-done-for-us-speech-by-andy-haldane.pdf?la=en&hash=E89B59B9A236C37F6DCE94CDC567B38A52835813.

14 14. Charles Goodhart and Manoj Pradhan, Future imperfect after Coronavirus. VoxEU, 27 March 2020. https://voxeu.org/article/future-imperfect-after-coronavirus.

15 15. Inflation: A tiger by the tail? Speech by Andy Haldane, 26 February 2021. https://www.bankofengland.co.uk/speech/2021/february/andy-haldane-recorded-mini-speech-on-inflation-outlook.

16 16. Letter from Governor Andrew Bailey to the Chancellor, 23 September 2021. https://www.bankofengland.co.uk/-/media/boe/files/letter/2021/september/chancellor-cpi-letter-september-2021.pdf?la=en&hash=12662A8C1907065B9C02D88F8A46FB3EA7B52458.

17 17. Quantitative easing: A dangerous addiction? House of Lords Economics Affairs Committee, 1st Report of Session 2019–21. 16 July 2021. https://publications.parliament.uk/pa/ld5802/ldselect/ldeconaf/42/4203.htm.

18 18. Ed Balls, James Howat and Anna Stansbury, Central bank independence revisited: After the financial crisis, what should a model central bank look like? M-RCBG Associate Working Paper No. 87. Harvard University, 2018. https://www.hks.harvard.edu/centers/mrcbg/publications/awp/awp87.

19 19. Simon Wren-Lewis, Macroeconomic policy beyond Brexit. The Political Quarterly, 21 February 2019. https://onlinelibrary.wiley.com/doi/full/10.1111/1467-923X.12647.

20 20. New economic challenges and the Fed’s monetary policy review. Federal Reserve Speech by Jerome H. Powell at Jackson Hole, Wyoming symposium, 27 August 2020. https://www.federalreserve.gov/newsevents/speech/powell20200827a.htm.

21 21. Balls et al., Central bank independence revisited.

22 22. Rethinking fiscal and monetary policy, post-Covid. Bendheim Center for Finance, Princeton University, 2 June 2021. https://bcf.princeton.edu/events/olivier-blanchard-on-rethinking-fiscal-and-monetary-policy-post-covid/.

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