yes let’s get creative – some ideas here

http://notthetreasuryview.blogspot.co.uk/2012/07/full-circle-on-policy-lets-hope-so.html

but let’s start talking helicopter drops, state refinancing of personal debt, and above all spending that directly creates demand for UK firms, and UK workers.

“Monetary expansion might help offset some of the impact of the government’s own fiscal tightening but it is unlikely to be enough to get the economy growing at a decent pace.”

The monetary base can be increased almost infinitely, so it could offset all the impact of fiscal tightening (and then some) if the MPC wanted that. The problem is that nobody quite knows what the MPC does want. They seemed willing to tolerate above target inflation for a while, but then got a bit skiddish a couple of months ago resulting in a vote against more QE despite the economy being in recession. Now they’re making some good moves, but the justification for them seems to be that inflation is falling faster than expected, so if that changes then I expect they’ll put on the brakes again. The bottom line is that we need the MPC to make an explicit statement about it’s goals and state the actions it will take to achieve those goals, like:

“We will increase QE by £10 billion per month while our internal 1 year forecast of the output gap remains negative and our 1 year inflation forecast remains below 5%”

Then we would see a return to growth. Fiscal policy is just a sideshow.

2 inyourhouse

Expansion of the monetary base is no substitute for fiscal loosening, which is what is really needed. Luis @1 has it right.

“Expansion of the monetary base is no substitute for fiscal loosening”

Err, yes, it is. The point of both expansionary monetary policy and expansionary fiscal policy is to increase aggregate demand, but monetary policy always dominates (and it’s also much less costly and much easier to reverse). If anything, the reverse of what you’re saying is true. If the BoE isn’t going to let inflation rise above x% then it doesn’t matter how much fiscal expansion the government undertakes – it won’t have any effect. Just look at Japan:

http://uneconomical.wordpress.com/2012/06/29/a-manifesto-for-economic-decline/

18 years of massive fiscal stimulus, and what happened to aggregate demand? Err, it fell. Why? Because the BoJ wanted 0% inflation, and tightened every time fiscal policy looked like compromising that goal. Now, the BoE isn’t quite as tight-fisted as the BoJ, but the BoE still has in mind some path for aggregate demand and it will tighten if necessary to achieve that.

Look at it this way: today the MPC could have voted for £175 billion of QE (or more), but they didn’t: they voted for £50 billion. Clearly they are engaging in much less expansionary policy than they could. Why? Because expansionary policy risks pushing inflation above the highest path the MPC sees as tolerable. It’s even more clear if you look at the May vote, where the MPC was against more QE despite a recession. Why? Well, look at the minutes: they explicitly refer to concerns about inflation!

At the end of the day, we’re only going to get the recovery the BoE wants us to get. It would be much more productive for the left to focus its efforts on changing the BoE’s mandate to something that allows more expansion (e.g. an NGDP level target).

@4 inyourhouse

Ah, I see where you’re coming from now. Yes, I agree, the inflation target needs to be either higher or looser, or expansion of EITHER kind (fiscal or monetary) is strangled at birth – fiscal because the MPC will offset it, monetary because the MPC won’t do it. Britmouse has been moaning about this for quite some time now!

The stated purpose of the new low interest loans from the BoE to the banks as announced in the Mansion House speeches of Osborne and Mervyn King, the BoE governor, is to promote bank lending to consumers and businesses and so boost demand.

So far so good. I’ve no objection to that in principle – quite the opposite – but there are two evident inhibiting factors:

(a) banks may be too reluctant to lend in current circumstances for fear of perceived lending risks

(b) potential borrowers may be reluctant to borrow for fear they will be unable to make the debt servicing payments

What, if anything, is to be done to address this?

If the banks aren’t lending, how about cutting out the middleman? Could we put some of the QE money directly into things that actually have a mission to promote growth through investment, like the Green Investment Bank, Regional Development Agencies, Passenger Transport Authorities, the Film Council, and such forth, rather than shoving it at the banks and looking angrily at them, which appears to be the present policy?

Quite. Wasn’t it Einstein who said that insanity was doing the same thing repeatedly and expecting a different result?