The Bank of England is, arguably, at the end of the road as far as currently agreed methods of monetary stimulus are concerned.
Interest rates are at their effective floor – in the UK, as understood by the Monetary Policy Committee – 0.1 per cent. QE purchases of assets stand at £745bn. This is unlikely to have done much harm [although some contest this] but equally, has probably not, at least as far as its later increments are concerned, imparted much stimulus either. At root QE policy is about swapping one zero interest, default-risk-free asset for another [reserves for gilts].
It would be reasonable to ask what the Bank’s senior officials are doing, then, in the oak panelled offices that they periodically visit, or on those zoom meetings that we presume happen. OK, so there are financial stability concerns and there have been interventions to stave off market dysfunction in the gilts market, but my rhetorical point is about the efficacy of monetary policy as conventionally understood.
Long before the covid19 crisis, many commentators, myself included, [but importantly see Krugman, Wren-Lewis, Portes and others] have wondered about the need for a variety of monetary-fiscal cooperation in the vicinity of the zero bound to interest rates. The pandemic has underscored the need for it. As news about the state of the virus itself, the ebb and flow of social distancing information, and economic indicators rolls in, there will be a need for successive rounds of fiscal stimulus, even contraction as we get to the point where good news arrives.
The BoE could be contributing to this, using its expensive and considerable analytical heft, currently functionally idel, and giving the government technocratic cover for fiscal fine- tuning that otherwise would be entirely political.
The Bank of England Act in 1998 was an attempt to delegate macroeconomic management to the central bank and remove it from the corrosive influence of politics. With the benefit of hindsight, an inflation target that was too low [2 per cent] was chosen, and we have been stuck at the interest rate floor since the onset of the financial crisis. Since that point, in large part, business cycle management has reverted to the Treasury, by default, with all the attendant costs [politics, smaller centre of expertise] and benefits [democratic legitimacy].
A relatively minor institutional reform could improve things while we are stuck with conventional monetary policy levers exhausted.
This would be to have the Bank of England publish its estimate of what it sees as the missing stimulus: what would it like to do with interest rates, if only doing that was stimulative, on the assumption that interest rate cuts had their nomal effect [the impact they have far from the zero bound]? The next step would be for the Treasury to decide whether to accept or reject this advice [thus retaining ultimate control over fiscal levers], to explain why if it declined, and to design a stimulus plan [with details of what spending and tax instruments, and unwound over what period, presenting evidence as to how this implements BoE advice], and with the Office for Budget Responsibility commenting on how the plans rated for long run fiscal sustainability.
Critics might wonder why I have framed this question around the exhaustion of conventional instruments, and not suggested that the central bank contemplate helicopter money. I am not completely against that as a policy option; but at currently very low interest rates I don’t see the point of crossing that rubicon yet when there is no constraint on conventional fiscal stimulus measures in the next few years. I certainly don’t see it as a motivation that helicopter money be considered above conventional fiscal stimulus for the sake of having the central bank be the author of it, rather than the government. This would be a superficial authorship only.
Absent a reform like this, the BoE will anyway have to steel itself to point out why and the degree to which it can’t meet its flexible inflation target mandate, begging the question, therefore, why the government does not do something about it [the mandate was, after all authored by the government in the first place]. What I am suggesting happens in an orderly and premeditated way will, therefore, happen, to a degree, by default, but with a clumsiness and potential for conflict, or inhibited and impaired communication, that will make things work much less well, and without the checks and balances provided by the OBR input.
