Friday, December 14, 2012
Money GDP - no panacea
Posted by David Smith at 03:30 PM
Category: Thoughts and responses

Britain's inflation target has had a good innings - it is now more than 20 years old. Long before it was adopted there wre prominent campaigners for a money or nominal gross domestic product target. Now, thanks to a speech my Mark Carney, Bank of England governor-designate, and an apparently open mind from George Osborne, it is back on the agenda.

Maybe, though the test is whether anything would have been different before the crisis with a money GDP target. Say the target was 5%. This was the kind of growth rate that was being achieved for money GDP in the run up to the global financial crisis.

Money GDP weakened in 2008, though only when real GDP collapsed. It would not have given any advance warnings of trouble, particularly as the originally GDP readings from the Office for National Statistics for the first half of 2008 were misleading.

The problem in the run-up to the crisis was not that money GDP was ignored. It was that other things were played down, including sharply rising asset prices and a sharp rise in bank lending to other financial institutions. The financial sector lent to itself, and the authorities did not respond.