Britmouse is "cautiously optimistic" that our inflation target might be replaced with a money GDP target. I'm not sure how much difference this would make, because I'm not sure the Bank has ever been that rigorous an inflation targeter.
R = (1.5 x P) + (0.5 x Qg) + c
But the Bank has not followed this rule. As I've pointed out, a better fit for Bank rate during the good times was:
R = (0.5 x P) + (1.3 x Qg) + 4.3
This latter equation predicts the present level of Bank rate better than does the Taylor rule: with CPI inflation at 2.6% and the output gap around 3% on OBR estimates, the Taylor rule says Bank rate should be around 3%*.
There are two important things about this equation:
- the coefficient on inflation is less than one. This means that if inflation rises, the real interest rate falls and monetary policy (by that measure) loosens. This is inconsistent with inflation targeting.
- the coefficient on the output gap is larger than the Taylor rule says. This is consistent with monetary policy doing more to stabilize real GDP.
All this is more consistent with the Bank targeting NGDP than it is with it targeting inflation. In this context, we shouldn't be surprised that inflation has averaged a percentage point more than its 2% target over the last four years. It's because the Bank hasn't really been targeting inflation at all.
Of course, the Bank hasn't successfully targeted NGDP, as this actually shrank in 2009. But this owes more to the massive adverse demand shock that it does to pig-headed inflation targeting.
In saying all this I am not criticizing the Bank. Monetary policy has had to be countercyclical because fiscal policy hasn't been sufficiently so. And this was true for much of the Labour years as well as the Tory years; in his famous exposition of policy principles (pdf) in 1997, Ed Balls gave little priority to using fiscal policy for countercyclical purposes.
To some extent, therefore, a switch to NGDP targeting would not be a radical change.
Instead, if you want to give the economy a cyclical boost, surely looser fiscal policy would be more effective.
* Assuming the c term is one, such that 2% inflation and a zero output gap gives us a 4% Bank rate.