Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 14 September 2015

Labour and Central Bank Independence

Sometimes Paul Krugman can be very annoying. On a number of occasions I have written a draft of a post, and while in the process of admiring editing it, have found that PK has just written something rather better. So I bin my post on why Corbyn’s resounding victory is partly the product of Labour’s failure to oppose austerity rhetoric: read this instead.

In any case it may be more useful to look forward to what Labour’s macroeconomic policy might become under Corbyn and the shadow Chancellor John McDonnell. There has been some suggestion, encouraged by what I insist on calling Corbyn’s QE, that Labour are contemplating getting rid of an independent Bank of England. I think in macroeconomic terms this would be a bad idea, and in political terms a terrible idea. It is best to say this sooner rather than later, before commitments are made.

In essence all the Bank of England normally does is decide how to change interest rates to hit a target decided by government. Whether it is an inflation target or some other target(s) is for the government to decide. There are plenty of macroeconomists who would favour a higher inflation target, or targeting a different measure, so there is a great deal of scope for change here. But once that target has been chosen, why are politicians better at trying to hit it than a bunch of technocrats some of whom have spent their lives studying this one task?

It is vital to appreciate how different the UK set up is from the Eurozone. Many years ago I was very suspicious of central bank independence (CBI), because I thought it might lead to just the kind of deflationary bias that we see today in the Eurozone. Partly because of decisions made by Ed Balls and Gordon Brown, the Monetary Policy Committee (MPC) in the UK is quite different. The target is symmetrical, and the MPC has independent members and is very transparent and accountable. So what is there not to like which the government cannot already change?

I fear the situation has become confused because of austerity at the Zero Lower Bound. What CBI prevents either the government or the central bank doing is a money financed fiscal stimulus: a fiscal stimulus paid for by creating money rather than issuing government debt. The central bank can create money, and has done, but cannot force the government to spend more or cut taxes. The government cannot force the central bank to permanently create money to finance these things.

But this is only a problem if you have a government committed to deficit fetishism. It would be ironic indeed that a Labour party now pledged to fight austerity decided it needed to print money because they were reluctant to borrow more. It would be the ultimate triumph of austerity, and also just daft.

It would also be a gift horse to those currently implementing austerity. It would allow them to say that the only alternative to austerity was printing money which would lead to inflation. They have already begun to say it. It is spin that can be fatally undercut as long as CBI is preserved. But if that independence is ended, then you will create an army of mainstream academic economists who will say that high inflation is now more likely.

There will be some of those who advise Corbyn and McDonnell who might be tempted to say what have mainstream economists ever done for us. But if Paul Krugman is right, and I think he is, one of the reasons that Corbyn got elected is that Labour party members could see that the government was pursuing a policy that went against mainstream, as well as some heterodox, economics. Corbyn and McDonnell will have enough enemies in the media and the City as it is. It seems just stupid to create enemies elsewhere by foolishly ending the Bank’s independence.


  1. John McDonnell on the first 100 days of Labour

    "In the first week of a Labour Government democratic control of the major economic decisions would be restored by ending the Bank of England’s control over interest rates and bringing the nationalised and subsidised banks under direct control to force them to lend and invest their resources to modernise our economy and put people back to work.


    We will free up these resources with a new budget in the first month of a Labour Government that introduces a wealth tax on the richest 10%, a land value tax, and a restored system of progressive income tax with a 60% level on incomes above £100,000 and 70% on incomes above £1 million. And also we will clamp down hard on the tax evasion and avoidance that is costing us £95 billion a year.


    We will end all privatisation, including in the NHS, and start the process of bringing our public services back into public ownership by renationalising our railways, with immediate price controls over energy prices and rail and bus fares"

    Someone like John McDonnell isn't remotely interested in what mainstream neoliberal economists think. this is not the Labour party of the Blair era which was interested in evidence based policy making.

    We are not in Kansas anymore.

    1. Indeed worrying sentiments.

      btw I would drop 'neoliberal' - this is something quite different from 'mainstream'.

    2. No, we're in 2012, when the socialist backbencher John McDonnell wrote an article for a small-circulation socialist magazine/Web site. Circumstances alter cases.

    3. magnus

      I personally don't think neoliberal means anything at all. It is just a phrase those of the left use to insult those to their right. So S W-L has used it of others, and John McDonnell would use it of S W-L.

    4. Hugo: of course neoliberal has a loaded meaning. It means that rather than letting evidence dictate your academic position, you let a neoliberal ideology do so. This is why it would be a much stronger statement to say that mainstream academic economists believe something rather than neoliberal economists believe something. I assume you meant the former, which would also be correct in this case, I believe. Of course people who engage in political debating and point scoring can use whatever semantics to forward their cause, but hopefully this is not the point here.

    5. Neo-liberal once met pretty much New Labour. Basically you should have free trade, labour and capital flows. The welfare safety net should be in place to take account of market failure. MP and FP policy should be anti-cyclical. There should be no moves by the central bank into credit allocation ('credit policy' as it is referred to by US monetarists). In political science terms it was a belief in the efficiency of markets and light touch regulation, but was also socially liberal. If you were not neo-liberal before 2008 you were on the fringe. It was highly pro liberalisation and globalisation.

      That changed with the financial crisis. The IMF now supports capital controls, and central banks actively make credit allocation decisions (ie they monetise private sector securities)


      So while I think we have seen a slight shift in the centre ground of many academic economists, this has not anything to do with criticising austerity policy in Britain and the Eurozone.

      However, I think the left is not happy with this. They want serious consideration again of prices and incomes policies and other active policies that get people back to work.

  2. Simon, I think you will have to work hard to persuade them. I would have thought emphasizing the idea of the dual-mandate might be one way of sweetening the pill for them.

  3. When defending central bank independence we should not also look at whether it was successful in reining in inflation. There would be correlation suggesting that it was from 97 to 2008 - no causality can be proven, though.

    Further, we should also note that inflation fell both in the early 80s, and again in the early 90's without BoE independence.

    Then, the independence is only granted to set interest rates to steer the economy, and that independence is only granted to a sub-committee of the Bank of England (Monetary Policy Committee,) which has strong independent outside influence.

    However, after 2009 and the introduction of QE the rules changed. Now the name of the game was to avoid deflation, and QE was the main monetary tool chosen to do so. the Treasury and the BoE decided together, so it was not an independent decision. But we now know that QE has a strong distributional effect which mainly subsidises the financial sector, and therefore re-distributes money towards the 1%.

    We all imagine the BoE still setting a minimum discount rate at which it lends to the banks, There the distributional effect was negligible. As long as you met credit criteria by the banks, who would lend the money on, then anybody could benefit.

    That is not true any more after 2009. Now the BoE actually pays money to the banks, as they are awash with QE money. The banks deposit the spare money at the Bank of England which pays 0.5% interest.

    QE is a fiscal policy, not my old car was chosen as an asset to be purchased by QE, or my house with negative equity, but only government bonds. So only holders of government bonds benefited. Letting them make substantial profits on the £375bn money spent on them. A redistirbution of wealth in society. Maybe £50bn was distributed to bond-holders this way, through just purchasing the bonds, and mainly financial assets gained in value through spill-over effects.

    This subsidy continues, though the payment of interest. And at the moment the BoE through its "independent" monetary policy costs the taxpayer £1.5bn a year. I think that definitely needs some political oversight, and the "independence" of the Bank of England should be stopped because of the unjustifiable subsidy of £1.5bn a year to banks, which will just flow into excessive bonuses.

    Further info on this on my blog post, which at the bottom has a link to an article in the NYT which discusses this type of "monetary policy" which is also an issue at the Fed.

    1. With regards to your point that "we should also note that inflation fell both in the early 80s, and again in the early 90's without BoE independence", this abstracts from the fact that those were relatively short-lived periods of time and the main benefit of CBI is to ensure that any short-run period of low inflation is not ended due to political interference. Central bank independence is, incontrovertibly, a good thing.

    2. Incontrovertibly is a long word, and very tendentious. In an inflationary world Central Bank independence seems to be beneficial: in a deflationary world the jury is still out, to say the least.

      I have not seen one iota of evidence, from SW-L or anyone else, that independent Central Banks have accelerated the emergence from recession. The only couter-argument is that some political systems (US Congress, to a lesser extent the EU Council of Ministers) are dysfunctional, but as they are generally responsible for appointing the relevant members of the Central Bank and setting its objectives this is only putting the argument at one remove.

    3. In a deflationary world (if such a thing actually exists!), CBI is still useful - in particular, the BoE's central target of 2% serves as an anchor for inflation expectations, indicating that the BoE will use whatever means it possess to get close to the target (i.e. the interest rate lower bound isn't as much of an issue as it might appear as the BoE can use whatever instruments it likes to achieve its target).

      (I am, of course, abstracting from the BoE's target being set conditional on the state of the world that prevails due to the obvious potential for such goals to be subject to political meddling.)

    4. Rohan, I just set out above that the BoE's armoury is very limited. Once they lowered interest rates, that is it.

      What instruments does the Central Bank have to achieve targets in a deflationary environment, apart from QE? (Which benefited the 1%) None! Because if they had some, they would have used them!

      So immediately we are at a stage where the BoE role in setting monetary policy becomes a farce. We have seen this now for 5 years+ and pretended they know what they are doing, but in reality the Emperor has no clothes. The BoE is naked and unprepared and unable to deal with a deflationary environment. That is the fact.

      We are in a debt deflation environment. Debts are being repaid, the volume of credit is falling, it is like Japan. And it will not change either. So it is time that the government took charge over monetary policy and actually did something useful with money being issued, other than give it to bond traders who made a killing from QE.

    5. Central Bank Independence is still good, because it allows Government to apply large stimulus packages without worrying about accidentally creating hyperinflation.

  4. Given that Corbyn seems to be very into the idea of debate / Hegelian dialectics, etc. and that he floated his CQE idea as just that, and idea, surely you, professor, have a responsibility to try to influence that debate in the direction that you would like.

    Obviously you've had relatively little success in trying to influence "mediamacro" but I would suggest that you have a more obvious target - i.e. the upper echelons of the Labour party / the shadow cabinet - at which to direct your arguments now.

    1. Isn't that what I'm doing here?

    2. To do that you have got to tell us what you would do different to New Labour (and address inequality and financial crises). New Labour should not mean 'moderate'. The centre ground has shifted. Criticising austerity is not enough. People want the government to do more than just have stop-go anti-cyclical policy.

    3. @Anon: The post is about anti-cyclical monetary policy, and there is clearly room for improvement in Corbyn's plans there. Do you think having an independent central bank would compromise the government's goals on financial crises and inequality? I fail to see why this should be the case - if you are concerned about monetary policy effects on crises or inequality, just alter the BoE mandate. In this case your argument seems rather bogus - it's like someone offering you a flu vaccine and you rejecting it because it doesn't cure cancer.

    4. So what are you suggesting a policy rule that the CB closes inequality?

      An independent central bank is a monetarist fetish. It comes from this thing they obviously have with money. Why do we not have an independent Foreign Office, you know the guys whose instruments include WMDs? Surely we can't trust the government and the public with that? You know this nonsense did not start with Lucas and Sargent. It goes back a long way. It is just people who want to keep the central bank engaged as a technical operation separate from the political and democratic process.

    5. @Mainly Macro I fear politicians don't read academics' blogs. Are you finding other additional ways to hammer on the shadow cabinet door?

    6. @ Anon 12:17
      We do not have an independent Foreign Office because Foreign office makes political decisions, not those of technocratic nature, and therefore it makes no sense to make the Foreign Office independent from government. At the same time, if the Foreign Office decides on a target for a WMD, it will be left to a group of technical specialists to try and hit this target, not politicians. See the connection here?

      I am actually interested in your views but all I hear so far is a lot of self-righteous hot air and polemic; calling something nonsense and mentioning random economists without explaining why.

      Maybe you could actually answer my questions: Do you think having an independent central bank would compromise the government's goals on financial crises and inequality? And, may I add, how?

      Finally, if you think that an independent central bank targeting inequality is nonsense, why do you think this is something that a government-owned central bank should target?

    7. "it will be left to a group of technical specialists to try and hit this target, not politicians. See the connection here?"

      Yes, most likely the army. I see no reason that decisions on the amount of money or interest rates in the economy should be independent from the legislature anymore than decisions to invade a country or raise taxation should be. If we can trust the public to make decisions on some of these things, and the use of things such as the country's armed forces, we can certainly trust them to make decisions regarding the use of monetary instruments and a central bank.

      There is only one institution that arguably should be free from the democratic process: the courts.

      "Do you think having an independent central bank would compromise the government's goals on financial crises and inequality?"

      Not necessarily, but I do not see the reason why it has to be done by an independent bank unless you think democratic institutions are incapable of doing this. Really it is a question of technocracy vs democracy. These are not economic questions. They are political science questions.

      "Finally, if you think that an independent central bank targeting inequality is nonsense, why do you think this is something that a government-owned central bank should target?"

      Because presumably that is what the democratic process (the public) asked it to do. I think the reduction of a central bank's remit to price stability or some narrow objective is a result of narrow economic theory (such as monetarist theory). The removal of a CIB will make the central bank's function better integrated into the elected government's broader economic agenda which would may include inequality, public investment, or financial crisis related management.

  5. I think SImon you will have to address a big part of the reason why Corbyn was elected. And that was a rejection of New Labour. New Labour's policies were essentially to have a welfare safety net, have anti-cyclical fiscal policy, give the central bank its independence and with everything else let the market work. The result was a big financial crisis and gaping inequality (which you cannot completely blame on globalisation). To fix England's problems you may need active intervention. Let's have a proper debate about this. We must not let American New Keynesians hijack this debate. What is moderate Labour to them might not be to most people in the UK. Let's talk about how we can deal with youth unemployment, poverty, and social services and infrastructure which most people feel is failing them. Let's see how they manage things in Europe and Japan (where you do get investment banks and prices and incomes policies and often with good results - but tabooed in the US). Quantitative easing has already led to allocative decisions by the central bank - and such decisions should really be made by parliaments anyway. Let's also not have this discussion dominated by an intertemporal budget constraint mindset and Sargent style stuff about fiscally driven monetary policy. What might be right for the US, but not be right for us.

  6. I've just gone to the BBC website to get their 'profiles' of both Corbyn and McDonnell.

    Each has just been posted, and I am not saying they have been done in surprised haste, but the one for McDonnell has the line "...and according to the Evening Standard..." within it!

    It's not just the Labour Party moderates stunned by this oddness.

    1. That is what it says now on the BBC website

      The veteran Labour leftwinger is best friends with Mr Corbyn and co-ordinated his election campaign. It is thought he was promised the top job some time ago. The MP for Hayes and Harlington previously stood for Labour leader in 2007 and 2010.
      A prominent rebel, he recently declared he would "swim through vomit" to vote against benefit cuts and faced criticism for telling a union event that he would "like to go back to the 1980s and assassinate Thatcher".
      He sparked outrage in 2003 by saying IRA terrorists should be "honoured" for taking part in their "armed struggle", while attending a gathering to commemorate the IRA hunger striker Bobby Sands.
      Mr McDonnell previously said a Corbyn government would pledge to clear the budget deficit, "but not by hitting the poor".

      Now, there is two things here. I do not think that is a fair portrayal of someone whose financial expertise goes back to running the budget for the Greater London Council (according to Paul Mason).

      So what the new shadow government really needs, much more than economic advice, is an anti-propaganda ministry, which would take issue with character assassinations such as the one by the BBC.

    2. Ken Livingstone has reminded us that John McDonnell not only ran the GLC budget but balanced it.

  7. The problem with the BoE setup is largely that of Central Bank Independence the world over. The consensus is set by the finance sector. The members of the committee are independent only if they have a future outside of the traditional sector.

    As a result, while inflation targets in lots of places are symmetrical, the consensus means undershooting is much more tolerated than overshooting.

    As we saw in the USA, there's a further issue that CBI all too often leads to a central bank that treats tax cuts as "not a big deal" but spending increases as "something we have to raise rates to lean against" irrespective of how these things are funded.

    I'm sure we'll see this play out again when Osborne cuts taxes in the run up to 2020.

    At which point, if you're elected by people who don't benefit from this bias towards increased unemployment, a shrinking state, top-rate tax cuts and measures to support the financial services industry, you're likely to find that the Bank is an obstruction...

    Can you change that without removing independence? It is possible, but it's not clear that the politics of it are better, except in the sense that you can lie about it in advance of being elected. "Oh, we support Bank independence." (Don't mention that we support it because we're going to change the Governor and the entire committee to an entirely different set of people with different backgrounds and philosophies...)

    Perhaps the problem is that lefties are too honest about their intentions...

  8. Potentially even more worrying than revoking the BoE's independence would be a Labour government expropriating private assets with zero compensation, as Corbyn is on record as stating he would do.

    1. These are public assets on which the private sector has made a killing - without giving much back.

  9. OT - Professor W-L - have you read about the Pound Campaign started by John Mills? What do you think of his contentions that the Balance of Payments is the actual elephant in the room regarding our economy? And what do you think of his remedies?

  10. The MPC members have more power than elected MPs so should also be subject to public selection and censure.

  11. Perhaps Corbyn could just set up the National Investment Bank anyway, and sell the bonds on the primary market. Then, the question is whether the BoE would buy them? Maybe they would buy them, giving us Corbyn's QE without any weakening of CBI.

    As Richard Murphy has observed, Osborne has already authorized exactly this!

    So maybe we can have central bank independence alongside more imaginative forms of QE?

    1. Of course we can. Furthermore, you could make NIB assets particularly attractive as a form of QE if they were linked to an immediate increase in investment. But given QE far from likely in near future, obviously should have a conventionally financed NIB anyway.

  12. I am not sure to understand why "printing money" would be the ultimate triumph of austerity?
    That the CB cannot finance the Government directly is a self-imposed constraint with little meaning, outside the neoliberal framework. In fact, it is regularly circumvented as the CB buys the bonds in the secondary market to meet its interest rate targets. Why would getting rid of this constraint be a triumph of austerity?

    1. Because it seems as if the proponents of Corbyn's QE want to end CBI in part because they are worried about deficit financing a NIB. Makes no sense in any framework!

  13. "But once that target has been chosen, why are politicians better at trying to hit it than a bunch of technocrats some of whom have spent their lives studying this one task?"

    As an American I'm talking about the U.S. context and not the U.K. but they appear similar.

    In the U.S. the Fed has failed to its target for years on end which is why there has been talk of switching the target. If the technocrats can't or won't hit their target then maybe they should lose their independence. Because we haven't had a swift recovery, wages are stagnating and inequality is increasing.

    But if Corbyn set up a National Investment Bank to help direct a People's/Corbyn QE would it really be limiting the central bank's indepedence that much if the central bank still determined when QE would be turned off?

    For example Bernanke determined when to start tapering (again too early). And the Fed is determining when to raise rates. It wouldn't hurt the central bank's independence to direct it to cooperate in a People's QE when it was time for a Bankers' QE. Perhaps they both could be combined with a helicopter drop for maximum effect.

  14. Great post. This sort of analysis of the details is essential in a potential time of the unknown for Labour. Whereas the broad analysis was wrong before 2015, detailed analysis may prove to be the undoing after 2015. (Naive lack of attention to detail in PFI contracts bears this out.)

  15. As I understand it the only difference between direct government spending and government borrowing (issuing bonds) is that the bonds provide risk free income for the banks. They - both represent the state's IOU. There is no logic to the notion that issuing government debt is preferable to direct state spending on infrastructure for example.

  16. A higher inflation target is all well and good *if* organised labour has the power to secure matching pay increases. However the current MPC and equivalent in the US have not been very good at hitting the given target. Perhaps they could do with the *political* power to request the treasury helps them out with some appropriate fiscal policy.

  17. The Bank's mission, in its own words, "is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability". Its 'independence' is not absolute but depends on it fulfilling that mission.

    Paragraph 7 of Schedule 2 of the Bank's Charter appears to give the MPC power to determine interest rates:
    " (1) The benchmark rate of interest for the purposes of paragraph 6(3) is the Bank rate.
    (2) In this paragraph, “Bank rate” means –
    (a) the official Bank rate determined by the Monetary Policy Committee of the Bank, or
    (b) where an order under section 19 of this Act is in force, any equivalent rate
    determined by the Treasury under that section.] "

    except that paragraph 8 states
    " The Treasury may by order amend or replace paragraph 7. "
    so the MPC's independence extends only as far as the Treasury permits.

    Section 19, mentioned in paragraph 7, refers to the Bank of England Act 1998 and paragraph 1 of that section states:
    " The Treasury, after consultation with the Governor of the Bank, may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances. "

    Ultimately, authority rests with Parliament as the representative of the British people and the Bank merits its independence only insofar as it works towards the common good and the popular will.

  18. "The government cannot force the central bank to permanently create money to finance these things."

    No proponent of MMT suggests that money printing should be permanent. Only that it should stop when the gap in output has been closed and inflationary pressures start to become apparent. To continually use the word permanent is to misrepresent the theoretical basis of MMT.

    "What CBI prevents either the government or the central bank doing is a money financed fiscal stimulus: a fiscal stimulus paid for by creating money rather than issuing government debt."

    But with MMT you do both. You issue debt and get the CB to buy it. This does not undermine CBI because the CB still has an inflation target and can therefore stop printing money when that target is reached. It is a holistic policy approach.

    What I find worrying about your arguments, Simon, is that you continually fail to acknowledge the inherent flaws in the alternative option represented by the existing government policy of financing through the Bond Market. As I have pointed out before:

    ...borrowing from the Bond Market inevitably leads to higher interest rates, a higher value for sterling on the FX markets, and a negative current account. How is any of that good, particularly in a recession.

    Whereas as I have said before: government can become insolvent if its debt is owned by its own people. It can always tax the people it owes money to in order to pay back its interest to them each month.

    And what about the correlation between the UK and US trade deficits and their governments' persistent budget deficits over the last 30 years? Does anyone seriously believe that this correlation is due to coincidence rather than causality?

    These are the issues that the macro community should be debating instead of ignoring.

    1. The government is issuing debt and the CB is buying it. So current policy is MMT?

    2. MMT is a description of operations of banks, CBs and governments that use sovereign currency and do not trade in foreign currencies, only in their own.
      It is a description of monetary operations of only sovereign countries, not of those using foreign currencies (fixed exchange rate makes it as if they use foreign crrency they tie it to).
      Is there any other economic theory describing monetary operations besides austrians and MMT? Austrians describe a Gold Standard while MmT describes fiat money.
      I have been looking but i have not found nothing in mainsteam theories besides a loanable funds model which is completely wrong and applys only to EZ, fixed excange and users of other currencies. LFT does not say nothing about fiat money.
      MMT is not a theory, it is a description.

  19. I hope Corbyn does not pay too much attention to mainstream economists - this was the mistake New Labour made. With zero interest rates, and what looks like a lot of idle capital waiting to be invested, it seems like the perfect opportunity for the government (or the central bank under its direction) to start making some long term investment decisions. Of course this has been done before in other countries - some well, some not so well. We should learn why the ones that were successful, were, and the ones that weren't, weren't. This basically means throwing away a lot of irrelevant models, and doing some thorough ground up economic history.

    1. So we should ignore all those mainstream economists because their arguments and models are rubbish. Yet, every mainstream economist I've heard on the subject wants more public investment. You should get out more!

    2. I think a lot of the reasons behind the events leading up to 2008 was that it precisely mainstream economists who needed to get out more. Do you even bother going as far as even talking to your colleagues in other subjects at High Table? Simply put if mainstream economists knew their history instead of messing around with rational expectations models it probably wouldn't have happened.

    3. "So we should ignore all those mainstream economists because their arguments and models are rubbish."
      We shouldn't ignore them completely (I comment frequently on your blog!) but their models are deeply flawed and have specious assumptions.

  20. Lets talk about CB Independence, but from whoom? From government or from bankers?

    No, no, we must talk only of independencw from 'guberment' (as Dubya says), we should not even mention independence from financiers and wealthy.

    This shows the inocous bias of many good economist that do not realize how biased they are.

    CBs are never independent politicaly, they are biased either with banks or with government. Not seing your own side bias is perfectly natural and most often the case.

    CB mainstream thinking is biased against economy and wages, that is a normal policy for last thousand years.
    Lets look at 2% inflation target as biased against wages and for bankers and wealthy. Why 2% target?

    Monetary policy works through rates on loans to private entities, not through public ones. This is what all CB governors are saying and is fully correct.
    QE is working on public debt rates not private, so how QE should help economy? No it is not helping economy nor wages. It is helping only banks and governments.

    If monezary policy works through private debt rates, and banks are not following those rates to offer at par with official rates to private borrowers then how is that supposed to help economy if banks are not offering low rates bellow 4%?

    So, banks are not offering rates at par once CB goes bellow 2%, simply do not.
    Inflation target is also interest rate wish/ want because .... Official rates are dependent and corespond closely to inflation level. Interest rates follow, not cause, inflation long term trends. Look at charts.

    So targeting inflation at 2% is having interest rates at 2% where they are not effective downward only upward. Upward rates are stiffling economy while downward are releiving economyof chains, but at 2% it is ineffective, banks do not follow it.
    This is bias of CB for finaciers and wealthy against wages and people.

  21. SW-L
    That is very correct that CB is not the one deciding on how much governemenz spends on stimulus. It is the responsibility of parliament not for CB. CB is providing funds for parliament's spending.

    But is money printing better then borrowing? How CB provides funds is important question too.
    I argue that borrowing is an cumbersome tool while printing is direct and much much better tool that is requierd at ZLB. There is enough debt for the purpose of manipulating monetary policy, no need for more of it.
    More debt requiers aditional spending after the need for stimulus ended in form of interest payments. This stimulates economy even tough it will be not needed anymore after huge increase of stimulus.
    So, stimulus by borrowing wil present a new challenge once stimulus is not needed anymore, while only challenge created by printing money is to stop it which is much easier if mechanism are set as extraordinery and temporary while at ZLB. Thos can be set up by CB to make and ensure twmporary nature.

    Just as interest rates go up after a slump, stimulus by borrowing will demand increased government spending after the slump by paying interest on old debt and put a preassure on public finances.
    There will be enoughpreasure from allready existing debts, adding more for stimulus will present a challenge that can be easilly avoided by printing money for stimulus.

  22. Are we forgetting the Treasury can issue notes, Bradburys? It seems we are.

  23. So, zero inflation again... I think some unconventional methods are needed. Or, if one is convinced that conventional measures are enough, then it implies that the BoE is not doing all it can to get inflation to 2%. Is the bank "really" independent anyway?

  24. Very much agree with the thrust of this (important) post. Maybe the sentence "What CBI prevents either the government or the central bank doing is a money financed fiscal stimulus" risks misleading. CBI does not, in my view, prevent monetary financing tout court. It does though prevent the government from forcing the CB into money finance and dictating quantities and duration. I agree that for political and economic reasons that would be a bad thing. That is also what the MF literature says. Fortunately it is possible to design "monetary dominated" MF schemes. I have proposed a rough one for the euro area which, whatever its other faults, gives the ECB the whip hand.

  25. Alex Douglas:
    "What’s emerging as the consensus view on Corbynomics, as I said, is that it threatens central bank independence. Or something like that. Here’s The Economist:

    At present the bank [of England] looks unlikely to embark on a fresh round of QE (instead it is mulling monetary tightening). If Prime Minister Corbyn were to rely on QE to fund public investment, he might be tempted to cajole the bank into prescribing more of it. At the mercy of politicians, the bank would lose its credibility, and confidence would drain from the economy, forcing interest rates up and crimping investment—again, just the opposite of what was intended.

    Really? Why? If the BoE were ‘cajoled’ into buying bonds issued by the National Investment Bank, then interest rates would presumably move down, not up, since the interbank market would be flush with reserves. But if the BoE wanted to drain those excess reserves, it would still have all its existing instruments for doing so, from Open Market Operations, to reverse repos, to offering time deposit accounts in the reserves facility, to issuing its own bonds.

    The Economist seems to have been misled by the ‘QE’ label into thinking that Corbynomics forces a certain monetary policy onto the BoE. But it doesn’t. It’s just a way of funding some infrastructure projects. The BoE can sustain its monetary policy however it likes, by making adjustments elsewhere. If it really worried that the market was being flooded with liquidity despite all its best efforts, it could just raise the interest paid on reserves (the support rate) to its target Bank Rate. Problem solved. Settle, petal.

    Then there’s Martin Sanbdu in the Financial Times:

    The problem … is that there is little reason to think the rate of money creation required to stabilise the economic cycle generally corresponds to the investment needs the country faces (which are not just cyclical but depend on secular socio-economic forces such as demographic change). Trying to achieve both with the same tool means one or the other will have to give.

    What does he mean, ‘same tool’? Again, People’s QE is just a way of financing some infrastructure projects. The BoE can buy the bonds for that, then it can do whatever else it likes to ‘stabilise the economic cycle’ (if you still believe that monetary policy has that power). It can never lose its control over the Bank Rate, since, again, in the worst-case scenario it could just set the support rate to its target. It can add and drain reserves in all its ordinary ways, compensating for the purchase of bonds from the National Investment Bank if it chooses to do so. There’s no new constraint on the BoE’s operations here. It can fund the infrastructure projects, then decide what monetary policy it wants to pursue. Take a chill pill, Martin.

    Or take Anatole Kaletsky in Prospect:

    But if QE is used to finance infrastructure investment or permanent social programmes, as proposed by Corbyn, the printing of money is bound to continue indefinitely, even when a tightening of monetary policy is required—and the outcome is bound to be severe inflation.

    Again, why? I don’t personally believe that a tightening of monetary policy would do much against inflation; it could even encourage it, but never mind that. The point is that the BoE is perfectly capable of tightening monetary policy, with or without People’s QE. At the risk of sounding like a broken record: if you can add reserves, you can drain reserves too. And even if you can’t, you can just set the support rate to your target. What’s your caper, Anatole?"

  26. A largely sound article spoiled by a bizarre paragraph in the middle:
    "It would be ironic indeed that a Labour party now pledged to fight austerity decided it needed to print money because they were reluctant to borrow more. It would be the ultimate triumph of austerity, and also just daft"
    When will it get through to commentators that what determines whether there is inflation or deflation is the amount of money in circulation; where it came from - BOE debt-free or from banks as debt to them - is irrelevant in that context.
    What does matter is the amount of debt - private and public - in the system. We are unfortunately saddled with 97% of our money as debt to commercial banks! this is both ludicrous and scandalous and much of it needs to be replaced with debt-free BOE money. Sadly replacing it through QE has allowed money to cascade into and through the banks into asset bubbles. But I suspect that we are stuck with the existing treasury bonds and will have to stomach it until they expire.
    For an economy to thrive, the more debt there is, all the more money is required to fund it - in other words debt is deflationary. So no wonder we are bouncing along the bottom of the longest depression ever experienced in a series of Dead Cat Bounces!

  27. Perhaps the key issue is whether monetary policy should be used at all. Perhaps, we should just have enough bank reserves to keep the base rate at zero (as we do now), not pay interest on reserves (Japan lets them stay at zero now don't they) and just have the treasury borrow using T-bills rather than long term bonds. Accept that QE has no beneficial effect and just leave all macroeconomic control in the hands of fiscal policy (eg use an asset tax to control credit fueled bubbles). Would such a diminished role for monetary policy be compatible with an independent central bank?
    In practice I really wonder whether the BoE has much capacity to effect the economy even now. But having unnecessary layers of complexity in the system makes everything more opaque. It provides a smokescreen that allows people such as Nick Clegg to be bamboozled into believing that austerity is required or else "we will see interest rates rise". Let's sweep aside that clutter -that's key for real democracy IMO.

    1. Agreed. Land value tax I would say for the "asset tax." However it can be argued land is not an "asset."

  28. It will be interesting to see Simon's critique of
    Pleased to see that at least we have a public debate in the right area now- one good effect of Corbyn already.

    1. I've only had a quick look, but it seems to be saying the equivalent of someone who is holding one of your arms behind your back and insists you are completely free because you can move the other arm. It also does not seem to address what is wrong with conventionally financing the NIB. But let me know if I should read more closely.

  29. Can anyone explain why a stimulus financed by printing money is going to be any more inflationary than one that is financed by debt? Surely government spending is always going to be inflationary when the economy is at or nearing capacity?


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