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Inflation targeting still beats other approaches – Mark Carney

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  • 07/02/2013
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Inflation targeting still beats other approaches – Mark Carney
Flexible inflation targeting will remain a superior framework to alternatives like nominal GDP targeting as long as certain adjustments are made, the incoming Bank of England governor has said.

Mark Carney told the Treasury Committee this morning a debate about the merits of a different approach should be encouraged, but stressed the importance of communicating central bank policy to ordinary people if nominal GDP targeting should work.

In December, he made headlines by suggesting central bankers should consider committing to low interest rates in order to boost economies, even when inflation picked up.

The Bank of Canada governor told MPs: “If a significant proportion of people in the economy don’t understand what the central bank is doing, effectively the main benefits of level GDP targeting go away and flexible inflation targeting dominates.”

“My view would be that flexible inflation targeting, potentially employed in a slightly different way, would remain a superior framework.”

As well as monetary policy, Carney fielded questions about his housing allowance, pension and decision-making structures in the Bank of England.

With a nominal GDP target the central bank would try to keep the nominal GDP growing at a predetermined rate, rather than targeting consumer prices. It is considered to be more robust when faced with supply shocks such as higher oil prices.

During Carney’s interview, the Monetary Policy Committee voted to maintain the Bank Rate at 0.5% due to a ‘stubbornly high’ rate of inflation.

An easing in credit conditions, helped in part by policies such as Funding for Lending, was likely to aid a slow but sustained economic recovery, the MPC suggested.

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