What's an Old Lady to do? Professor Jagjit Chadha on the choices facing the Bank of England

Written by Professor Jagjit Chadha Thursday, 04 October 2012 14:15
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Jagjit Chadha is Professor of Economics at the University of Kent, and author of the forthcoming The Euro in Danger with Michael Dempster and Derry Pickford (to be published Searching Finance, October 2012). 

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 There are growing calls to consider moving from inflation targets to nominal income targets as the prime objective of monetary policy.


There is much merit in such a move.


No central bank model yet can accurately forecast the split between real and nominal GDP particularly well as this requires us to understand whether shocks currently driving the economy are primarily demand or supply and also what the slope of short run aggregate supply curve is, which is itself likely to vary with an unknowable level of spare capacity.


So the argument runs, let's limit ambition and simply target real GDP growth and, broadly speaking, inflation jointly rather than the latter explicitly and the former implicitly (because inflation is generally thought to be consequence of lagged, current and expected output gaps).




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