Why inflation targeting might be failing the UK economy
In short: For three years, the UK has faced a strange economic paradox: inflation has remained stubbornly above target, while economic growth continues to underperform. Professor Douglas McWilliams suggests that the Bank of England's current strategy is outdated and proposes a fundamental shift in how we measure success.
In a 2013 lecture at Gresham College, economist Douglas McWilliams, then the Mercers' School Memorial Professor of Commerce, challenged the efficacy of simple inflation targeting. He pointed to a persistent disconnect in the UK economy where inflation rates exceeded targets for three consecutive years, even as growth remained sluggish. To resolve this, McWilliams argued that the Monetary Policy Committee should instead adopt Money GDP targets. This proposal follows his earlier work regarding a new theory of economic growth. The lecture was delivered as the UK prepared for a new Governor of the Bank of England.
The motivation for this shift is rooted in the pressures of global competition. McWilliams noted that emerging economies, often characterized by more authoritarian structures, have achieved 'supercompetitive' status by maintaining lower cost bases than developed nations like Singapore or Hong's Kong. As these economies grow, Western nations face a difficult choice: implement wage moderation and reduce government-imposed costs, or allow currency devaluation. However, the latter is constrained because significant devaluation triggers inflationary pressures. He noted that these emerging markets have progressed at a much higher velocity. This rapid development has created a landscape of intense global competition.
The mechanism of inflation is also shifting. While inflation was traditionally driven by labor costs, McWilliams observed that modern inflation is increasingly dictated by commodity prices and government policies, such as those affecting housing planning. Because the scale of possible devaluation is limited by these inflationary risks, a nominal GDP target could provide a more stable framework for managing the pace of growth, interest rates, and the social consequences of unemployment during periods of economic recovery. The economist reflected on how inflation drivers have changed since he began his career in economic forecasting nearly four decades ago. He emphasized that the chosen policy would directly influence mortgage payments and the accessibility of employment.
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- Summary by Intellect · source: Should the UK Adopt Money GDP Targets? - Professor Douglas McWilliams
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