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<div class="image-container float_right"><div class="image">Business Insider/Mike Nudelman</div></div><keyword id="6355253" type="ORGANIZATION" weightage="60" keywordseo="Federal-Reserve">Federal Reserve</keyword> vice chairwoman Janet Yellen seems poised to receive the White House's nomination to replace Fed chairman Ben Bernanke in the top spot at the central bank when his term expires in January.
Her fiercest competition for the nomination, former Treasury Secretary Larry Summers, withdrew his name from contention last week. Before that, though, the debate over which candidate was better-suited for the job was unusually intense, especially for a Fed nomination.
The debate raised the question for a few observers like Lars Christensen, head of emerging markets research and cross asset allocation at Danske Bank: why choose either?
"I have another candidate," <a href="http://marketmonetarist.com/2013/07/31/forget-about-yellen-or-summers-it-should-be-chuck-norris-or-bob-hetzel/">wrote Christensen on his blog in July</a>. "Chuck Norris! Or rather I strongly believe that monetary policy needs to be strictly rule-based, and if you have a rule-based monetary policy, who is Fed chairman isn't really important."
At the moment, U.S. monetary policy can hardly be described as rule-based.
Last week, the Federal Open Market Committee (FOMC) - the Fed's monetary policymaking body - shocked markets with its decision to refrain from tapering quantitative easing. The taper was a policy move widely expected on Wall Street, based on the strong signal Bernanke was said to have sent to market participants at the press conference following the FOMC's June 19 policy meeting.
"Why bother with transparency when you can and do change your minds?" asked ED&amp;F Man Capital managing director and bond market veteran Tom di Galoma, saying what it seemed like everyone was thinking following last week's FOMC decision.
The dissonance here is a result of the Fed's drive over the past year or so to introduce greater transparency into its decision-making process, something that won't change for Yellen or whoever else takes over at helm of the central bank when Bernanke exits his post in January.
Of course, that's only the most fashionable criticism of Federal Reserve monetary policy at this particular moment. Some have argued that policy has been too loose in recent years, laying the foundation for dangerous asset bubbles that will have to be dealt with down the road. Others have contended that policy has been too tight, failing to adequately stimulate the economy and provide it sufficient aid in returning to sustainable levels of growth.
So why not take the power to set monetary policy out of the hands of the chairman of the Federal Reserve and the small committee of bankers and economists who sit on the FOMC and just let the markets decide what the Fed should do?
That's essentially what Christensen has in mind when he suggests nominating Chuck Norris to replace Bernanke.
In his blog post, he pointed to a recent paper by Bentley University economist Scott Sumner, a leading advocate of this type of approach.
"Under a strict monetary policy rule, monetary policy will be fully 'automatic', especially if you introduce '<a href="http://mercatus.org/publication/market-driven-nominal-gdp-targeting-regime">A Market-Driven Nominal GDP Targeting Regime</a>'," wrote Christensen. "This is, of course, what we call the Chuck Norris Effect - that the markets are implementing monetary policy."
Sumner explains in the paper how setting up a nominal GDP futures market and letting traders place their bets would make monetary policy "fully automatic," as Christensen describes it, using a hypothetical example in which the Fed is targeting a 3.65% nominal growth rate for the American economy:
In most futures markets, a change in investor sentiment affects the price of the futures contract. This proposed market would be very different. The Fed would peg the price of NGDP futures at $1.0365, but only during the period where it was the target of monetary policy. During this period, changes in investor sentiment would affect the quantity of money, not the price of NGDP futures.
For market expectations to determine monetary policy, there must be a link between NGDP futures purchases and sales, and the quantity of money. This link can be achieved by requiring parallel open-market operations for each NGDP contract purchase or sale. Because investors buying NGDP futures are expecting above-target growth in NGDP, the Fed should automatically reduce the monetary base each time an investor buys an NGDP futures contract, and it should automatically expand the base each time an investor sells an NGDP contract short.
For instance, each $1 purchase of a long position in an NGDP futures contract might trigger a $1,000 open-market sale by the Fed. A purchase of a $1 short position would trigger a $1,000 open-market purchase by the Fed. In that case, investors would be effectively determining the size of the monetary base.
Traders would continue buying and selling NGDP futures until the money supply had adjusted to the point where the market expected NGDP growth to be right on target.
"Recall that after the central bank stops pegging a particular contract (and starts pegging the next contract), its price can rise or fall," writes Sumner. "Thus, people would trade NGDP contracts for exactly the same reason they trade any other asset: in the hope that the price will move in the direction they anticipate (after the Fed is no longer targeting the price)."
Sumner goes on to argue that if an NGDP futures market were in place in 2008, when the financial crisis hit, the experience would have been vastly different:
<div class="column">
Under the monetary regime described here, the United States would never face the situation that occurred in the latter part of 2008. By late 2008, it was obvious to market participants that NGDP growth during 2008-9 would be far lower than the Fed would have liked. Indeed, NGDP fell by 4 percent between mid-2008 and mid-2009-the steepest decline since the Great Depression. Asset prices were falling sharply as investors reduced forecasts of future nominal growth and future asset prices. Yet, even though financial-market participants saw what was happening, investors had no way to profit from that information. Markets were unable to correct the Fed's monetary policy errors. 
If an NGDP futures market had existed in 2008, investors would have sold NGDP futures until the money supply had increased sharply enough to produce on-target expected NGDP growth. That does not mean actual NGDP growth would have been exactly on target; no monetary regime can guarantee that result. But if even expected NGDP growth had been on target, it would have been a vast improvement over actual monetary policy, which was far off course in late 2008. On-target expected NGDP growth would have helped to stabilize asset markets.
</div>
The nominal GDP targeting idea has been kicked around elsewhere on Wall Street for a while. Goldman Sachs Japan chief economist Naohiko Baba endorsed it in a November 2011 note to clients, asserting that "a move to a nominal GDP (NGDP) target would stand a better chance [than an inflation target] of helping the Fed achieve both parts of its dual mandate over time."
 "It would provide a way to strengthen the employment side of the mandate, while allowing for errors in the estimation of potential output," wrote Baba. "If combined with a commitment to use the remaining tools of monetary policy aggressively, our analysis suggests that it could potentially give a significant boost to growth and employment."
So, is it time for a nonhuman Fed chairman and just have moentary policy be set automatically? 
"There is no reason why the FOMC should be limited to 12 members, or indeed why there should be any limit at all," says Sumner.
And given the state of the global economy, monetary policy may well be headed in that direction.
"Nominal activity continues to be extremely low globally in spite of 4-5 years of zero-interest rate policies (ZIRP) and QE," says Deutsche Bank head of fundamental strategy Jim Reid. "So do we need to fundamentally change the way monetary policy is enacted? And if so, how? We would argue there should be more debate around the idea of a Nominal GDP Target (NGDPT). This could be the next big theme if nominal activity remains as stubbornly low as it has been so far post-crisis."

Is It Time For The First Non-Human Chair Of The Federal Reserve?

<div class="image-container float_right" style="width:400px"><div class="image"></div>Bloomberg</div>Incoming <keyword id="106488" type="CITY" weightage="60" keywordseo="Bank-of-England">Bank of England</keyword> Governor <keyword id="223491" type="PERSON" weightage="60" keywordseo="Mark-Carney">Mark Carney</keyword> is delivering a three-hour testimony before Britain's Treasury Committee this morning.
Carney's name has been associated with nominal GDP targeting – arguably the hottest idea in <keyword id="6357126" type="ORGANIZATION" weightage="60" keywordseo="monetary-policy">monetary policy</keyword> right now, but something that has yet to be taken up by a major central bank.
In a speech in December, Carney <a href="http://www.voxeu.org/article/monetary-targetry-might-carney-make-difference">talked up the concept</a>, saying it "could in many respects be more powerful than employing thresholds under flexible inflation targeting," the latter of which is basically what is being employed by the Bank of England at present.
At today's testimony, Carney said that flexible inflation targeting was the best monetary policy in existence, and the bar for changing the inflation target is high. He also said there was some merit to considering "Fed-style" guidance at the Bank of England.
However, when asked to address nominal GDP targeting, Carney said that the policy had advantages "in theory" at the zero lower bound, but that he remained "far from convinced" that moving to a nominal GDP target is the right thing to do.
Carney even said that an economy in the U.K. economy's current position is where a nominal GDP target would work best, but qualified that by highlighting the need for the population to understand what the central bank is doing with nominal GDP targeting in order for it to work.
To conclude, Carney said flexible inflation targeting remains a superior alternative to nominal GDP targeting.
The WSJ's Simon Nixon summed it up best in a tweet:
<blockquote class="twitter-tweet">
So Carney has knocked <keyword id="1771731" type="UNKNOWN" weightage="60" keywordseo="NGDP-Targeting">NGDP targeting</keyword> on the head. Baffled why he ever let himself become associated with it.
— Simon Nixon (@Simon_Nixon) <a href="https://twitter.com/Simon_Nixon/status/299485024468758528">February 7, 2013</a></blockquote>

Those hoping for Carney to bring the monetary policy revolution to the Bank of England may be a bit disappointed for now.

The Hottest Central Banker In The World Isn't Sold On NGDP Targeting

The hottest idea in monetary policy circles over the last couple of years has been the notion that the Fed could induce a better recovery by stating a target for Nominal GDP.
The idea (which has been endorsed by economists like Scott Sumner, David Beckworth, Michael Woodford, Christina Romer, and others) is premised on the idea that if the <a href="http://www.businessinsider.com/michael-woodford-endorses-ngdp-targeting-2012-9">Fed can set aggressive expectations for its actions</a>, and commit to letting inflation run "hot" for periods of catch-up Nominal GDP growth, then economic participants will adapt to this forecast.
Although the idea is very buzzy in academic circles, it hasn't quite broken through yet to the <keyword id="6355253" type="ORGANIZATION" weightage="60" keywordseo="Federal-Reserve">Federal Reserve</keyword> itself, although the Fed did to a lot this year in terms of experimentation with guidance and easing, most notably adopting "Evans Rule" which commits to low rates until unemployment hits 6.5%, or inflation expectations surpass 2.5%, at which point the Fed may re-assess.
But in a new note out today, Goldman's Jan Hatzius and Jari Stehn say that one Fed official has already endorsed Nominal GDP targeting in all but name, and that nobody has really realized it yet.
That official is SF Fed Chief Janet Yellen, who is thought to be one of the top contenders for Bernanke's replacement.
Hatzius and Stehn write:
...Fed officials appear to be contemplating an even bigger shift. This is evident from a series of speeches given by Vice Chair Janet Yellen in 2012 that presented simulations with the Board staff’s large-scale econometric model, FRB/US, using an “optimal control” approach to monetary policy. Under such an approach, the central bank chooses a path for the federal funds rate which best meets its objectives over the next several years as a whole, even if this means committing to a policy that may appear suboptimal at certain points along the way. For example, the chosen path may imply that in 2013, the Fed expects inflation in 2015 to be above its target but nevertheless commits to refraining from an aggressive monetary tightening at that point. Economist Paul Krugman has referred to this approach, approvingly, as “credibly promising to be irresponsible.”
...
So far, no sitting Fed official has publicly called for an NGDP target. But Yellen’s optimal control approach is equivalent to a specific form of such a target. To our knowledge, nobody has pointed this out yet, although it is at least implicit in the academic literature on this issue. In a highly stylized model, Woodford has shown that the optimal policy at the zero bound is an NGDP target. In a simulation that also uses FRB/US—as does Yellen’s optimal control work—San Francisco Fed President John Williams and Fed economist David Reifschneider have shown that the optimal policy at the zero bound responds not only to current inflation and unemployment gaps but also their cumulated history. In other words, the optimal policy at the zero bound in FRB/US does not look like a Taylor rule but resembles an NGDP target.
The basic gist is: A nominal GDP target commits to periods of overly-hot inflation (irresponsibility) in order to get to a certain target.
And according to Goldman, Janet Yellen has basically endorsed the same thing, with the same economic consequences.
<a href="http://www.businessinsider.com/michael-woodford-endorses-ngdp-targeting-2012-9">For more on how NGDP targeting works, see here &gt;</a>

GOLDMAN: A Top Fed Official Has Endorsed Nominal GDP Targeting, And Nobody Has Even Noticed It Yet

<div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"><a href="http://commons.wikimedia.org/wiki/File:Black_mamba_looping.jpg">Wikimedia Commons</a></div></div></div>Fundamentally changing the way that the Bank of England is run is the only way to end a dangerous cycle of boom and bust in Britain's economy, according to one of the most well-respected economic policy organisations in the country.<a href="http://www.adamsmith.org/news/press-release-boe-must-abandon-inflation-targeting-to-avoid-another-banking-crisis-says-new-report/">A new research paper from free-market think-tank, the Adam Smith Institute</a> argues that the <keyword id="6354868" type="COUNTRY" weightage="60" keywordseo="UK">UK</keyword> is trapped in a cycle of "artificial booms" and "genuinely painful busts" and that the best way to go about ending this would be for a sea change in the way UK economic policy is conducted.The report makes lots of recommendations, but the key point is this: we should scrap the Bank of England's Monetary Policy Committee. The ASI argues that, in the long run at least, getting rid of the MPC - the group within the Bank of England responsible for steering monetary policy in the UK by setting interest rates, and inflation targets - is the best way to take the UK's economy forward, and move the country away from a "century of failure".In a statement released alongside the paper, <a href="http://www.adamsmith.org/wp-content/uploads/2016/01/Sound-Money-AJE4.pdf" onclick="__gaTracker('send', 'event', 'download', 'http://www.adamsmith.org/wp-content/uploads/2016/01/Sound-Money-AJE4.pdf');">Sound Money: an Austrian proposal for free banking, NGDP targets, and OMO reforms</a>, ASI Director Eamonn Butler said: "The Bank of England - and America's Federal Reserve - have done a very poor job of managing our money."They have created artificial booms, followed by genuinely painful busts, through decades of following their unreliable 'discretion.' You cannot fly a modern economy by the seat of your pants: it's time to replace the Bank's bumbling with rational rules."Professor Anthony Evans, who authored the paper is pretty critical of British monetary policy, saying (emphasis ours):The ASI argues that instead of the MPC running things when it comes to interest rates, the power to issue currencies should be put into the hands of private banks, which it argues, brought financial stability to "18th and 19th century Scotland and elsewhere."The report also puts forward the idea that in the immediate future, quantitative easing, not interest rates, should be the main way for the Bank of England to set monetary policy.<div class="KonaFilter image-container display-table float_right"><div><div class="image on-image">REUTERS/Blair Gable</div></div></div>As it stands, the Monetary Policy Committee is made up of nine members, led by Bank of England governor Mark Carney.Every month they meet for a few days, and eventually make a decision on what should happen with the UK's base rate of interest, following a recommendation from Carney. Each of the nine members is given an equal vote, with a majority vote deciding what will happen.For the last six years, the MPC's decision has always been to keep interest rates at 0.5%, although a hike is expected at some point this year, after <a href="http://uk.businessinsider.com/federal-reserve-announcement-december-16-2015-12?r=US&amp;IR=T">Janet Yellen and the Fed took the plunge in December 2015 and upped the USA's basic rate for the first time in six years.</a>The institute believes in totally free markets and so it makes sense that members would argue for an end to intervention from the Bank of England. But, while it's clearly unlikely that the MPC will actually get scrapped any time soon, the suggestion is interesting.<a href="http://uk.businessinsider.com/bank-of-england-chart-on-robots-taking-jobs-2015-11">Following a study from the Bank into the potential for robots to take people's jobs in the future</a>, Andy Haldane, the bank's chief economist, and an MPC member, argued <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech864.pdf">that "</a><a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech864.pdf">humans still have a big role" when it comes to setting policy</a>, and argued against any rules based system. However, he did joke that he "dreams of the day" when his job is taken by a robot. <div class="margin-top"> <h3>NOW WATCH: <a href="http://www.businessinsider.com/everyday-phrases-smart-people-say-incorrectly-2016-1">Everyday phrases that even smart people say incorrectly</a></h3> <div> <div> <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="44Z3ZoeDrznjy0zyuh6chLpAhZsFsPBY" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div> </div> </div> </div>

A massive change at Bank of England could end the UK's boom-and-bust rollercoaster

<div class="image-container float_right"><div class="image"><a href="http://www.youtube.com/watch?v=2yhu9YzcdXI">YouTube</a></div></div>There <a href="http://www.businessinsider.com/stanley-fischer-deputy-fed-chief-2013-12">are reports</a> that The White House will nominate former Israeli central bank chief <keyword id="341085" type="PERSON" weightage="60" keywordseo="Stanley-Fischer">Stanley Fischer</keyword> to serve as Deputy Fed Chair, taking over the job Janet Yellen will vacate when she becomes chair. 
People are freaking out because Fischer is an unexpected and unprecedented choice, and an absolute legend in central banking circles. 
<a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/15/stan-fischer-saved-israels-economy-can-he-save-americas/">This longer profile of Fischer</a> from the Washington Post's Dylan Matthews is worth reading, but here are a few of the reasons his rumored nomination has people so excited.
<ul>
<li>He's credited with essentially saving the Israeli economy, the economy barely faltered during the global financial crisis.</li>
<li>While other countries were still struggling in the depths of recession or depression, Fischer actually raised rates in Israel in 2009, basically saying that the crisis was over for the country. It's the ultimate central banking power move. </li>
<li>He aggressively manipulated the country's currency, the Shekel, and the massive devaluation helped the country keep growing </li>
<li>Israeli politics might be even more dysfunctional than the US congress, but Fischer still got the job done, and is hugely respected in the country. </li>
<li>Fischer was Ben Bernanke's thesis advisor at MIT, probably the world's best economics department, and advised other famous economists like ECB Chief Mario Draghi and Harvard's Greg Mankiw.</li>
<li>He is a brilliant academic economist, and one of the fathers of New Keynesian economics, which is the dominant approach in leading departments</li>
<li>He has some fascinating and unconventional views on monetary policy, and is a <a href="http://www.businessinsider.com/stanley-fischer-stepping-down-as-bank-of-israel-chief-2013-1">de facto champion of NGDP targeting</a>.</li>
<li>The rest of his resume is equally stellar, he helped resolve the Asian financial crisis of the late 90s at the IMF, and rose to a top job at Citigroup</li>
</ul>
Fischer is a rockstar.

Here's Why People Are So Excited That Stanley Fischer Might Be The Deputy Fed Chief

<div class="KonaFilter image-container float_right"><div class="image on-image">Reuters/Baz Ratner</div></div>Stanley Fischer <a href="http://www.businessinsider.com/obama-to-nominate-fischer-to-fed-today-2014-1">will be officially nominated today</a> as a Governor and Vice Chairman of the Federal Reserve, the job Janet Yellen is vacating as she becomes Chairwoman. 
While Yellen is incredibly qualified, it's exciting to have Fischer beside her. 
He's a legend in central banking and economics circles, and for good reason. Fischer's a highly accomplished monetary economist, and excelled as Israel's central banker. 
When rumors of his nomination cropped up, Morgan Stanley's <a href="http://www.businessinsider.com/morgan-stanley-on-stanley-fischer-2013-12">Vincent Reinhart wrote</a> that it would create a "Fed Dream Team." 
<a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/15/stan-fischer-saved-israels-economy-can-he-save-americas/">There's a longer profile of Fischer</a> from the Washington Post's Dylan Matthews that's worth reading, but here are a few of the reasons his nomination is great news.
<ul>
<li>He's credited with essentially saving the Israeli economy, the economy barely faltered during the global financial crisis.</li>
<li>Fischer's <a href="http://www.businessinsider.com/goldman-stanley-fischer-monetary-policy-2013-12">skeptical of forward guidance</a> as a policy tool, something Yellen endorses, which hopefully means he'll bring debate and an outside viewpoint to Fed meetings. </li>
<li>While other countries were still struggling in the depths of recession or depression, Fischer actually raised rates in Israel in 2009, basically saying that the crisis was over for the country. It's the ultimate central banking power move. </li>
<li>He aggressively manipulated the country's currency, the Shekel, and the massive devaluation helped the country keep growing. </li>
<li>Israeli politics might be even more dysfunctional than the U.S. congress, but Fischer still got the job done, and is hugely respected in the country. </li>
<li>Fischer was Ben Bernanke's thesis advisor at MIT, probably the world's best economics department, and advised other famous economists like ECB Chief Mario Draghi and Harvard's Greg Mankiw.</li>
<li>"Fischer has been around the inner circle of international economic policymaking for three decades," Morgan Stanley's Vincent Reinhart <a href="http://www.businessinsider.com/morgan-stanley-on-stanley-fischer-2013-12">wrote in a research note.</a> "If he was not at a major meeting in person, one of his students from his long tenure at MIT probably was."</li>
<li>He is a brilliant academic economist, and one of the fathers of New Keynesian economics, which is the dominant approach in leading departments.</li>
<li>He has some fascinating and unconventional views on monetary policy, and arguably a <a href="http://www.businessinsider.com/stanley-fischer-stepping-down-as-bank-of-israel-chief-2013-1">de facto champion of NGDP targeting</a>.</li>
<li>The rest of his résumé is equally stellar, he helped resolve the Asian financial crisis of the late '90s at the IMF, and rose to a top job at Citigroup</li>
</ul>
It's difficult to think of a more qualified or interesting choice for an essential job.

America's Monetary Policy Dream Team Is Finally Coming Together

<div class="image-container float_right" style="width:362px"><div class="image"></div><a href="http://commons.wikimedia.org/wiki/File:Stanley_Fischer,_Governor_of_the_Central_Bank_of_Israel_(2).jpg">Wikimedia Commons</a></div>Just breaking now.
The head of the Bank of Israel, Stanley Fischer, is stepping down.
He's considered one of the world's top central bankers.
Back in 2011, <a href="http://www.ft.com/intl/cms/s/0/0ff40f02-9505-11e0-a648-00144feab49a.html#axzz2JN8fq7Z8">Mohamed El-Erian endorsed him</a> as a brilliant economist who should take over the IMF. <a href="http://esoltas.blogspot.com/2012/06/israel-targets-ngdp.html">Evan Soltas has pointed out</a> that Fischer has been a de facto champion of NGDP targeting, who has kept the Israeli remarkably stable.
In this day of Central Banker poaching (the Bank of England hired Mark Carney from the Bank of Canada), this is an interesting free agency.
Here's the <a href="http://www.bankisrael.gov.il/en/NewsAndPublications/PressReleases/Pages/29012013.aspx">full press release</a> from the Bank of Israel.
-----------------------------------
The Governor of the Bank of Israel, Stanley Fischer, today informed the Prime Minister, Mr. Benjamin Netanyahu, of his intention to step down on June 30, 2013, after more than eight years as Governor. The Governor noted that in addition to the goal of advancing the Israeli economy, one of his primary goals he had set himself was passing a new Bank of Israel law. That was done in May 2010. Since then, the Bank has operated successfully within the framework of the new law, especially through the work with the Monetary Committee and the Supervisory Council. 
The Governor said that in the coming months he will continue to deal fully with all matters pertaining to the Bank. Prof . Fischer added that he is extremely grateful for the opportunity he has been granted by the Government of Israel to fulfill the task of Governor, especially during a challenging period that included the global economic crisis, a complex geo-political reality, and domestic social issues. 
The Governor thanks the Prime Minister, the Minister of Finance, the Chairman of the Finance Committee of the Knesset, the Members of the <keyword id="6357126" type="ORGANIZATION" weightage="60" keywordseo="monetary-policy">Monetary Policy</keyword> Committee, the Supervisory Council and the management and staff of the Bank of Israel for the privilege of working with them during his term as Governor. The Governor will hold a press conference tomorrow, Wednesday, January 30th, at 11:00 AM, at the Bank of Israel.

One Of The World's Top Central Bankers Announces That He's About To Be A Free Agent

<div class="KonaFilter image-container display-table float_right"><div><div class="image on-image"><a href="http://uk.businessinsider.com/here-comes-uk-inflation-2015-1"></a></div></div></div>Inflation is at a 14-year low in the <keyword id="6354868" type="COUNTRY" weightage="60" keywordseo="UK">UK</keyword>. With oil prices still dropping, it's likely that it will fall to the lowest levels in decades during the coming months. A lot of people, <a href="http://uk.businessinsider.com/how-deflation-will-affect-europe-2015-1">including me</a>, have made a big deal about how deflation is a bad thing for Europe. 
But I don't think there's very much to worry about in the UK.
The eurozone was pushed into deflation in December by falling oil prices, but its inflation was a lot lower than the UK's for a lot longer. Mark Carney is no hawk when it comes to monetary policy, and he called falling oil prices an "unambiguously net positive" factor for the UK at his last major press conference. 
That's because oil prices falling is an example of supply side deflation: When things get cheaper because there are more of them, or they're easier to make. That's sometimes known as "benign deflation". The opposite version is demand side deflation: When goods get cheaper just because people don't have as much money to spend, and producers are forced to cut prices. 
For the UK, the current drop in inflation looks pretty benign. Even if oil prices keep tumbling, the effect can only last so long: Imagine that prices fell to $40 by February. If they're still at $40 in February 2016, then oil would no longer be putting any downward pressure on prices. 
There are a number of reasons that the UK is in a better place than the euro area: The UK has better population dynamics than the eurozone, where the population of people aged 16-64 has already started to fall. The IMF have suggested before that an ageing population (and shrinking workforce) <a href="http://www.imf.org/external/pubs/ft/wp/2014/wp14139.pdf">can in themselves drive deflation</a>. 
Unlike the euro area's stagnant unemployment, UK joblessness is becoming increasingly rare. The rate has fallen to 6%, down from over 8% at the start of 2012, and it still seems to be falling. That should put pressure on pay packets as employers increasingly have to compete for staff.
Here's the major difference between the UK, US and eurozone summarised in one chart:
<div class="KonaFilter image-container display-table click-to-enlarge"><div><div class="image"><a title_source="Berenberg Bank" title_caption="" class="zoomin" href="https://static-ssl.businessinsider.com/image/54b5045bdd0895862b8b4579-960/screen shot 2015-01-13 at 09.48.43.png"></a>Berenberg Bank</div></div></div>
While the eurozone's nominal GDP (a combination of real economic growth and inflation) has been pretty much stagnant since 2009, edging up and down just a few percentage points, UK and US NGDP is now more than a quarter higher than it was in 2006. That's a symptom of the fact that the eurozone has had a big demand problem and a fairly ineffective monetary policy. Deflation puts pressure on indebted households and governments, and is made doubly worse when there's no growth.
Some people are worried about the "second round effects" of lower inflation: people become used to low or no inflation and plan for it. This could hypothetically be a problem for wages, if employers feel less pressure to raise salaries since prices are falling or flat. But could that really happen to the UK just because of a brief spell of oil-driven deflation? Not everyone agrees.
Here's how Robert Wood, chief UK economist at Berenberg Bank, puts it: 
<blockquote class="blockquote">
In our opinion, those theoretical risks are overblown for the UK. Consumers will not delay buying a television because it cost them less to fill up the car at the pump, and falling unemployment along with solid growth should mean employers do not get a free ride in setting wages. 
</blockquote>
The UK economy is still not in amazing health. Some of the UK's growth has been a little illusory, simply due to the fact that the population has been growing. Wage growth has been stagnant or actually negative for years. Some of the drop in inflation could plausibly be low for demand-side reasons and that would be a bad thing. But there haven't been many signs that's the case. 
Crucially, if petrol prices and utility bills are falling, consumers are free to buy other things: Oil prices only bring down inflation because their byproducts make up a big chunk of what people buy, and that leaves them with more disposable income to spend elsewhere. The drop in inflation should show up in an uptick in growth, something that certainly hasn't happened in the eurozone.
The Bank of England looked through above-target inflation for years after the financial crisis, and quite rightly: Rigidly sticking to an inflation target would have been a bad idea when the economy was weak and really needed stimulus. Now, the economy is not weak and further easing doesn't seem necessary. The Bank is safe to wait and see.

Deflation In The UK Might Be A Good Thing

<div class="image-container float_right" style="width:400px"><div class="image"></div><a href="http://www.flickr.com/photos/worldeconomicforum/5393267553/">World Economic Forum</a>Incoming BoE Governor <keyword id="223491" type="PERSON" weightage="60" keywordseo="Mark-Carney">Mark Carney</keyword></div><keyword id="1644621" type="PERSON" weightage="60" keywordseo="Albert-Edwards">Albert Edwards</keyword> is "not happy," he tells clients in his latest note.
The bearish Société Générale strategist's mood has been soured in part by incoming Bank of England Governor Mark Carney's testimony before the British Treasury Committee yesterday, which Edwards says was a "classic example of Central Bank 'bull'."
The episode confirmed his view that the most dangerous thing out there right now is central bankers' overconfidence in their own abilities to support economies and avoid unwanted inflation.
The SocGen strategist even goes so far as to compare Carney to Alan Greenspan, saying the former Federal Reserve Chairman's "post-crash accolade – ‘probably one of the most ruinous central bankers ever’ - may even be up for grabs."
Below is Edwards' take on Carney's testimony yesterday (emphases his):
And while we are on the theme of mission creep, the incoming Bank of England Governor Mark Carney has given the clear impression from his statements over recent weeks that he does not agree with Mervyn King’s comments that QE is reaching the limits of effectiveness. Carney is willing to be much more aggressive – at least George Osborne will be pleased. In his evidence on Thursday to the Treasury select committee he repeated his idea that if existing QE measures fell short, central banks should consider shifting to targeting nominal gross domestic product, which would allow them to respond much more aggressively to a downturn in economic output and place as much weight on supporting growth as reining in inflation.
Now personally I have no great ideological attachment to inflation targeting as opposed to any other method to control inflation, but I note with alarm the tendency of policymakers to become more and more interventionist in their monetary experiments. It may be that central bankers will keep control of the tiger they are riding, but history suggests that central bank intervention may make things worse in the long run rather than better. Marc Faber’s comment that he is so bearish that he sometimes wants to throw himself out of the window really resonates with me when I see what the central bankers are doing.
In 2005 I described Alan Greenspan as an economic war criminal when most others had decided he was “the greatest central banker who ever lived”, Hence I note with alarm that some commentators are so excited about the appointment of Mark Carney to the Bank of England Governorship that now he Carney, is now being dubbed “the world’s greatest central banker”. Oh dear! From everything I have read so far I fear that in the fullness of time he will have more similarities with Alan Greenspan than just this unwanted accolade and his legacy will be equally destructive.
Edwards goes on to compare Carney to Rudolf von Havenstein – the central banker that presided over Weimar Germany's post-war hyperinflation – writing, "Let’s see if we can see any of the Rudolf in Mark Carney’s reflection?"
He cites a piece written by former colleague Dylan Grice, who after examining Havenstein's story concluded in his own note, "The fact is we do understand the economics of inflation...and we know that once you’re on that path it can be extremely difficult to get off it."
"I wish Mark Carney, the new Bank of England Governor the very best of luck," Edwards writes, "and if, as I suspect, monetary mission creep accelerates under his governorship, he will need all the luck in the world."
MORE: <a href="http://www.businessinsider.com/mark-carney-speaks-out-on-ngdp-targeting-2013-2">The Hottest Central Banker In The World Isn't Sold On NGDP Targeting &gt;</a>

ALBERT EDWARDS: Mark Carney May Become 'One Of The Most Ruinous Central Bankers Ever'

<div class="image-container" style="width:600px"><div class="image"></div>REUTERS/Marcelo del Pozo</div>
The crisis in <keyword id="6373843" type="COUNTRY" weightage="60" keywordseo="Cyprus">Cyprus</keyword> is a good opportunity to take a step back and remind ourselves how incredibly broken the Eurozone remains.
For one thing, the whole reason the Eurozone has these sovereign debt crises is because while the countries share a common currency, they don't share a common Treasury. So it is literally possible for a country to just run out of cash. That can't happen in a country like the U.S. or the U.K., which are capable of creating their own money.
And then even beyond that, the single monetary policy isn't helpful. The periphery needs much more stimulus, whereas Germany is worried (perhaps fairly) about bubbles, as everyone rushes cash into its borders. Plus, Germany has virtually no unemployment, so it sees no need for stimulative measures.
Economist and professor <a href="http://macromarketmusings.blogspot.com/2013/03/missing-forest-for-tress-cyprus-edition.html">David Beckworth</a> looked at the big picture on Monday, pointing out how the system needs some serious structural reforms to function properly.
One reform is to alter ECB policy so that it actually tries to stabilize nominal spending for the entire Eurozone, not just Germany. Since it inception, ECB monetary policy has been <a href="http://macromarketmusings.blogspot.com/2012/01/is-there-really-german-bias-at-ecb.html">biased toward Germany</a> at the cost of destabilizing the Eurozone periphery. This could be fixed by having the ECB abandoned its <a href="http://macromarketmusings.blogspot.com/2013/02/note-to-charles-goodhart-europe-is.html">flexible inflation target</a> and adopt a NGDP level target. Another complementary reform, would be to create meaningful fiscal transfers in the Eurozone similar in scale and scope to the United States. Both of these options, however, would face stiff opposition from Germany. For the former would require temporarily higher inflation than Germany desires and the former would require large fiscal commitments for the Eurozone from Germany. Neither is likely to happen.
The Eurozone made its first step towards a true structural reform last summer, when the ECB announced its "OMT" program, which begins to establish the central bank as a lender of last resort, backstopping governments that get into trouble.
That's cooled the crisis a lot (reducing government borrowing costs) but the catch is that to be eligible, countries have to put on handcuffs (reforms, austerity, etc.) and that's sent the economies of various countries right into the toilet.
Here, for example, <a href="http://www.tradingeconomics.com/italy/unemployment-rate">is the unemployment rate in Italy</a>.
<div class="image-container" style="width:600px"><div class="image"></div><a href="http://www.tradingeconomics.com/italy/unemployment-rate">Trading Economics</a></div>
That's hardly an unusual looking chart.
Outside of Germany, pretty much every economic indicator in the Eurozone just gets worse and worse.
While Mario Draghi rightly can claim to be the world's #1 central banker (given the difficult situation he faces, and his limited mandate) leadership remains poor.
In the wake of the Italian election -- wherein incumbent Prime Minister Mario Monti received a pathetic 10% of the vote -- he was praised for having taken the tough unpopular austerity decisions that allowed interest rates to fall as they have. In fact this was nonsense. Interest rates fell because of the ECB. Austerity and reform didn't accomplish squat on their own.
But the beatings will continue until morale improves.
Against the backdrop of bad theory and bad policies, Europe has engaged in a series of ad hoc rescues and bailouts that tamp down flareups where they occur.
And heretofore Europe has actually gotten lucky. All the big votes have gone Europe's way.
Remember all those Greek austerity votes? They always passed by the skin of their teeth.
Remember the German Supreme Court decision on the legality of the bailouts? <a href="http://www.businessinsider.com/bundesverfassungsgericht-decision-on-the-esm-2012-9">It went Europe's way</a>.
Remember when <a href="http://www.businessinsider.com/slovenia-approves-efsf-expansion-2011-9">Slovenia</a> was the center of attention, because it came close to not approving the expanded bailout plan? Slovenia eventually played ball.
And then of course the public elections always turned out okay. In Greece last summer, the conservative New Democracy party narrowly edged out the leftist SYRIZA party. Had SYRIZA won, it would have set up an epic clash, as SYRIZA was not going to go along with the austerity that was demanded by the outside.
It looks like Europe's luck is running out.
In Italy last month, the election ended inconclusively. The center-left coalition failed to get enough votes (it seems) to form a government, and there might need to be new elections.
And then it finally happened in Cyprus yesterday. A bailout vote just failed. It didn't just fail. It didn't even garner one yea vote.
And the whole reason Cyprus is faced with this awful bailout proposal (which taxes depositors) is because if Cyprus were to just get a grant or a blank check without brutal conditions, then that couldn't pass the German parliament. So there are really two parliaments here that are ready to vote 'no' on something.
This has always been the risk to the system, that a vote would go wrong. And now it's happened.

Europe Is A Complete Disaster, And Its Luck May Have Just Run Out

<div class="KonaFilter image-container display-table float_right"><div><div class="image on-image">REUTERS/KyodoJapanese Prime Minister Shinzo Abe during his re-election campaign in 2014.</div></div></div>Japanese Prime Minister Shinzo Abe has seen better days. His popularity has tumbled, and his flagship economic policy is failing to produce the goods. At least, that's a view growing in popularity both in Japan and abroad.Abe came to power in 2012 with a major mandate. He was going to revitalise Japan's flaccid economic performance, ending decades of deflation. For this purpose, he brought in Haruhiko Kuroda as Bank of Japan governor. Kuroda launched a massive QE programme and introduced a 2% inflation target. QE was later increased in 2014. Abe set about with fiscal stimulus and supply-side economic reform.It's also impossible to divorce Abe's economic strategy from his geopolitical aims. He is a committed conservative with a revanchist international stance, not a centre-left Keynesian of the sort more familiar in the west. The passing of his recent security bill goes hand-in-hand with his economic strategy, both pushing towards his overall goal: Make Japan Great Again. It's a matter of national pride as much as national accounts.It's pretty common right now to hear Abe panned, even by people who were initially positive about its aims. <a href="http://uk.businessinsider.com/japan-just-slipped-back-into-core-deflation-for-the-first-time-in-more-than-two-years-2015-9">Core inflation in Japan recently fell back below 0% in August</a>, causing some people to declare the return of full-blown deflation. I <a href="http://uk.businessinsider.com/shinzo-abe-is-right-abenomics-has-not-failed-and-he-deserves-credit-2014-11">thought they were wrong in November last year</a>, and I still think they're wrong now. Much of the economy is in a good state, on the face of things. At 3.3%, Japan's unemployment is at an enviable level, one which it's unlikely western economies will reach at all. In fact, Japan's labour market at its very worst rarely records unemployment of over 5%. For a country like France, unemployment doesn't fall that low at the best of times. But Abe can't take full credit for the decline in unemployment, something that was beginning before he took office late in 2012. The real success or failure of Abenomics is based on only two factors.<div class="KonaFilter image-container display-table float_right"><div><div class="image on-image">Thomson ReutersAbe's efforts to revitalise Japanese foreign policy is linked to his economic expansion plans.</div></div></div>First, Abe promised to improve the structure of the Japanese economy. This was the "third arrow" of Abe's plan, and involved corporate governance and regulatory reform, as well as trying to narrow the gap between the country's regular and often strict labour market - Japan's famous salary men - and the growing ranks of more precariously employed temporary workers.Second, he promised reflation and its associated benefits. This mean raising inflation in Japan, something that has been missing for a quarter of a century, and it also meant driving investors from the safe government bonds and into riskier investments, like corporate bonds and stocks. This came through the first two "arrows", monetary and fiscal stimulus.Returning inflation primarily means raising nominal GDP. That's the growth of the economy, including inflationary effects - simply the amount of yen spent in the economy. Usually, you'll hear figures for nominal GDP, which matters for how well-off a country is. But nominal GDP matters for something else - debt. If you run a $200 debt and have an annual income of $10, it's paid off considerably quicker if your annual income rises by 10% a year than if it's completely stagnant.Japan's NGDP has been stagnant for the best part of a quarter of a century, and as a result, it has one of the world's highers debt to GDP ratios. Japan's ratio of government debt to GDP is over 230%, in a comparison to just over 100% for the US. Even Greece's debt to GDP isn't get 200%.So what you want to have is a higher GDP deflator. That's the part of the national statistics that measures how much of the increase in the size of the economy is just down to inflation, rather than real growth (of course, you want higher real growth too).GDP deflator has risen year-on-year for five quarters; the only time it's done so since 1994. The last similar (but weaker) boost was seen in 1997-1998, but it promptly derailed by the Asian crisis.Take a look:<div class="KonaFilter image-container display-table"><div><div class="image">Japan Cabinet Office, Business Insider</div></div></div>In the 10 quarters during which Abe has been in office and which we have data for (from Q4 2012 to Q2 2015) nominal GDP has risen by 5.84%, which is the second-most significant rise over the period, narrowly beaten the Q2 1995- Q4 1997 increase of 5.94%. You can see that in the chart below:<div class="KonaFilter image-container display-table"><div><div class="image">Japanese Cabinet Office, Business Insider</div></div></div>Those numbers are pretty meagre by western standards. A good increase in nominal GDP might be 4-5% per year. But for a country like Japan, where nominal GDP has risen by less than 1% in a little over two decades, what we've seen since Abe took the reigns is a pretty brisk pace. Abe also recently announced a target to raise nominal GDP to ¥600 trillion ($5 trillion, £3.29 trillion).The recent growth is all the more interesting because Japan entered a small recession after the tax sales hike that was brought in during April 2014, and even that didn't derail the expansion. The hike was not part of Abe's plan, with a timetable having been introduced by Noda, one of his predecessors. After the economy began contracting, Abe cancelled the second planned hike and called an election, which he won without difficulty.But even if you do insist on looking at the consumer price index rather than the GDP deflator, things aren't nearly as bad as the doom-mongers might have you believe.In fact, the proportion of items in Japan's core CPI basket (the goods used to calculate inflation) with increasing prices is now higher than it was before the financial crisis hit.Here are some charts included with <a href="https://www.boj.or.jp/en/announcements/press/koen_2015/data/ko150909a1.pdf">a recent speech from Sayuri Shirai</a>, a Bank of Japan policy board member:<div class="KonaFilter image-container display-table"><div><div class="image">Bank of Japan</div></div></div>That's important because it indicates that the reason Japanese headline inflation is low is the same reason it's particularly low in the United States, Europe and the <keyword id="6354868" type="COUNTRY" weightage="60" keywordseo="UK">UK</keyword> - a few volatile and tumbling prices, particularly those heavily influenced by oil.What's more, Japanese inflation isn't back to zero once the effects of volatile oil and food prices. In fact, by that measure, Japan's inflation is in one of only two periods of growth during the past 15 years:<div class="KonaFilter image-container display-table"><div><div class="image">Bank of Japan</div></div></div>So complaints about the ability of Abenomics to generate inflation are overdone.In the early part of 2013 it became an analyst cliché to argue that only the third arrow of Abenomics really mattered. So how has that gone? <a href="http://www.ft.com/intl/cms/s/0/ee40a73c-521d-11e5-8642-453585f2cfcd.html#axzz3n2LMsBMg">In the Financial Times</a> this month, Robin Harding and Leo Lewis give a fair appraisal of how things have gone. Abe's pledge to align the country's labour market is undoubtedly his least fulfilled. There has also been little to no progress on immigration, which Japan may need to boost its demographics.But in other areas there's been more progress. Agricultural reform has gone as planned, and corporate governance reform has been lauded. Long-term complaints about structural issues, like the number of women in work, are being quite genuinely addressed:<div class="KonaFilter image-container display-table"><div><div class="image">FRED</div></div></div>Like the overall unemployment rate, Abe can't take full credit for the increase in female employment (though the rate has been rising a little more quickly since he took office). But it's clear that some of his critics should check they're not throwing stones in glass houses - the United States' worrying struggles with participation mean the Japanese female employment rate is now higher than its US equivalent.No, inflation hasn't returned to the 2% the Bank of Japan is aiming for, and growth is patchy (though not particularly poor by Japanese standards), but what we're seeing is the first genuine increase in the price level since at least the Asian crisis, if not since the bursting of Japan's colossal equity bubble in 1990.It's the most serious and sustained effort at revitalising the country's supply-side too, but that sort of thing can't be turned around overnight.Abe's efforts haven't fulfilled the greatest hopes of his fans, and Japan isn't yet on a sustainable growth path. Other factors, like <a href="http://bruegel.org/2015/09/chinas-woes-could-derail-abenomics/">China's economic trauma</a>, could still derail the plan. But for now, Abenomics is very much alive and kicking when you look beyond the headlines. <div class="margin-top"> <h3>NOW WATCH: <a href="http://www.businessinsider.com/incredible-things-steve-cohen-buys-2015-7">Here are some incredible toys hedge fund boss Steve Cohen has bought with his billions</a></h3> <div> <div> <div class="ooyala-video-player" data-video-autoplay="false" data-video-id="hxaWhmdjqQ1wSzMOYSNGSRh8z8wLe12M" data-player-variable="ooyalapopvideo" id="ooyalaplayer_popvideo" style="width:1280px;height:720px"></div> </div> </div> </div>

You Searched For "NGDP Targeting" and got 11 results

Is It Time For The First Non-Human Chair Of The Federal Reserve?

Matthew Boesler

The Hottest Central Banker In The World Isn't Sold On NGDP Targeting

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GOLDMAN: A Top Fed Official Has Endorsed Nominal GDP Targeting, And Nobody Has Even Noticed It Yet

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A massive change at Bank of England could end the UK's boom-and-bust rollercoaster

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Here's Why People Are So Excited That Stanley Fischer Might Be The Deputy Fed Chief

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America's Monetary Policy Dream Team Is Finally Coming Together

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One Of The World's Top Central Bankers Announces That He's About To Be A Free Agent

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Deflation In The UK Might Be A Good Thing

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ALBERT EDWARDS: Mark Carney May Become 'One Of The Most Ruinous Central Bankers Ever'

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Europe Is A Complete Disaster, And Its Luck May Have Just Run Out

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Don't pan Japan - Abenomics is still working

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