Scott Sumner: The BIS Should Have Written a Very Different Report
Scott Sumner at the Economist:
Economics: Don't base monetary policy decisions on estimates of "slack": THE Bank for International Settlements argues that due to high levels of structural unemployment there is less slack in the global economy than is commonly believed. They see higher inflation as a threat, and recommend that central banks tighten monetary policy. There are all sorts of problems with the BIS recommendation. First, central banks should target market inflation forecasts, and various market indicators suggest that US inflation will remain below 2% for the next 5 years. More importantly, it’s a mistake for central banks to base policy on estimates of “slack”.... Economists aren’t even close to being able to identify the level of structural unemployment in real time.... If we learned anything from the experience of the 1970s, it is that we should not base monetary policy on estimates of the level of structural and cyclical unemployment. Instead, policymakers should focus on a nominal target.... In my view nominal GDP targeting would be better than a pure inflation target, as it would better accommodate supply shocks, and more closely correspond to the “dual mandate” of monetary policymakers in countries such as the US. By that criterion, monetary policy in the US, Europe, and Japan has been far too contractionary since late 2008.
