{"id":6715,"date":"2019-11-12T08:30:50","date_gmt":"2019-11-12T08:30:50","guid":{"rendered":"https:\/\/progressiveeconomyforum.com\/development\/?p=6715"},"modified":"2019-11-12T08:43:53","modified_gmt":"2019-11-12T08:43:53","slug":"can-the-bank-of-england-do-it","status":"publish","type":"post","link":"https:\/\/progressiveeconomyforum.com\/development\/blog\/can-the-bank-of-england-do-it\/","title":{"rendered":"Can the Bank of England do it?"},"content":{"rendered":"\n

It is now widely acknowledged that central banks acting in\nisolation do not have the capacity to stabilise the economic system. Larry\nSummers recently\nargued<\/a> that central bankers are facing “black hole monetary\neconomics”, wherein the usual tools of monetary policy have become\npowerless. At what was effectively his last European Central Bank press\nconference, Mario Draghi noted\nthat<\/a> “there was unanimity [among the council members] that fiscal\npolicy should become the main tool”.<\/p>\n\n\n\n

Even a few years ago such views would have been seen as\nheretical: it was assumed that a return to the system of macroeconomic\nmanagement that prevailed before the financial crisis was just around the corner<\/a>. Instead,\ndiscussion is now dominated by the tools that central banks should turn to next:\nhelicopter\nmoney<\/a>, deficit\nmonetisation<\/a> or negative\ninterest rates<\/a>? Demands are also growing for central banks to join the\nfight against climate\nchange<\/a>.<\/p>\n\n\n\n

The disintegrating conventional view, that a return to\npre-crisis orthodoxy is both possible and desirable, mirrors what Henderson and\nKeynes called “the fashionable view” of the 1920s: the view that all\nthat was necessary to recover the sunny, predictable comforts of Edwardian\nempires was a return to the monetary arrangements that obtained before the war.\n<\/p>\n\n\n\n

On the 90th Anniversary of Henderson and Keynes\u2019s “Can Lloyd George Do It?<\/a>“, which argued against this view, and in favour of Lloyd George’s programme of public spending, we have written a report for the Progressive Economy Forum<\/a> on the effectiveness of the Bank of England\u2019s monetary policy.<\/p>\n\n\n\n

The report argues that a reversion to pre-crisis central\nbanking is neither possible nor desirable. Just as the Bank did not have the\ncapacity to stabilise the pre-crisis economic system — stable inflation during\nthis period was, instead, due to factors outside the Bank\u2019s control — it does\nnot have the capacity now to achieve stabilisation using a broader array of\ntools. Nor does it have the power, acting alone, to achieve productivity\ntargets or a carbon-neutral transition.<\/p>\n\n\n\n

The principal reason why pre-crisis central banking is not\npossible is that the Bank of England now has a substantial balance sheet which\ncannot be reduced without adverse consequences for capital markets in Britain.\nThe principal reason why pre-crisis central banking is not desirable is that it\nwas precisely that model of central banking, restricting monetary policy to the\nmanagement of short-term interest rates, that contributed to the crisis that\nbroke out in 2007 and caught the Bank of England by surprise. The Labour\nParty\u2019s review of policy offers an opportunity to re-examine how central banks\ncan contribute to stabilising economic activity at high rates of employment. <\/p>\n\n\n\n

The report reviews various proposals that have been put forward for enhancing the responsibilities of the Bank of England. Targets for productivity<\/a> would work in a perverse way and may create unemployment, while credit support for greening the economy requires a much greater investment irrespective of Bank support. The report concludes that the Bank has limited instruments for influencing economic activity, and those instruments should be concentrated on what the Bank can do effectively, which is to contribute to economic growth and prosperity by maintaining financial stability. We therefore argue that the Bank should be given an enhanced financial stability mandate in the form of a target to conduct open market operations to keep the yield curve<\/a> stable. This should be implemented through a policy of open market operations aimed at keeping rates of interest at different maturities stable at levels that support the solvency of financial institutions, and the availability of finance for investment. This is what the Bank of England can do. Stabilisation of the economic system and regulation of employment and investment is a matter of policy for Government, not the central bank.<\/p>\n\n\n\n

The full report can be read here<\/a>. Photo credit: Flickr\/Dun.can<\/a>. <\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Professor Jan Toporowski and Dr Jo Michell introduce their new paper for PEF, examining the scope and operations of the Bank of England’s monetary policy.<\/p>\n","protected":false},"author":11,"featured_media":6718,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"site-sidebar-layout":"default","site-content-layout":"default","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","ast-disable-related-posts":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center 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