The Fed vs the BoE

Yesterday the Fed pirouetted neatly, simultaneously beginning to taper its quantitative easing and suggesting that policy will not tighten until well beyond its guidance threshold for unemployment. The sum impact has been a loosening of policy but what interested me is the sequencing of its actions.
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Autumn Statement 2013

The Chancellor gave his mid-year summary of the UK’s position to the House yesterday. He said

Mr Speaker,

Britain’s economic plan is working.

For those of you unfamiliar with the UK economy, here are some headline charts:

UK macroeconomic situation
1UK_rGDP 2UK_rGDP_growth
4UK_unemployment 16Real_wages

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Also, careful justifying inequality

You have seen me say that some inequality is “good”, and you have seen Shamubeel say that inequality is “natural”.  It was with this in mind that Shaz told me to post about this comment from Boris Johnson.

Despite calling for more to be done to help talented people from poor backgrounds to advance — including state-funded places at private schools — Mr Johnson said some people would always find it easier to get ahead than others.

He said: “I don’t believe that economic equality is possible; indeed, some measure of inequality is essential for the spirit of envy and keeping up with the Joneses and so on that it is a valuable spur to economic activity.”

I fear that people think the value judgments espoused by Johnson are similar to the ones economists hold when discussing inequality – this is not the case.

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Does the BoE’s view on uncertainty make sense?

Uncertainty is an unavoidable element of policy decisions. In the words of the great Donald Rumsfeld, we must confront the unknown unknowns. In this appearance the BoE’s chief economist, Spencer Dale, discusses his approach to dealing with uncertainty in the context of forward guidance. Essentially, he says that the Bank doesn’t know how big the output gap is so it has been cautious with forward guidance. He suggests that any other course of action would risk pushing up inflation expectations.

His view is understandable, given the Bank’s inflation target, but it is probably not optimal for the UK. Read more

When forward guidance doesn’t guide

VoxEU have recently launched a book on forward guidance and it has demonstrated wonderfully my ignorance of central banking. I thought that when bankers issued ‘forward guidance’ they were doing it to escape the zero lower bound by promising to keep rates lower for longer than they normally would. Something like this:

Source: VoxEU eBook

Source: VoxEU eBook

The ‘Odyssian’ guidance seeks to lift nominal expectations by promising not to tighten policy in future. For a while, the bank’s policy rate will dip below the level you’d expect if they were never at the ZLB. That is the sort of guidance that the Bank of England has explicitly disavowed. Read more

Having skills and using them are very different

The OECD have recently released a new survey of skills and it has prompted plenty of wailing about the failings of the English education system. The crucial slide from Andreas Schleicher’s summary is this one: It shows that English adults have excellent literacy skills relative to their peers internationally but young people have fallen well behind. Given the efforts that have been put into the UK’s schooling system over the last few decades it charts a depressing decline. Hearteningly, it is not the full story of the survey. Read more