Monetary policy: There is no substitute for common sense

The imminent departure of Mervyn King from the Bank of England has brought about renewed debate over the framing of the policy target set by the Treasury for the Monetary Policy Committee.

The BoE chairman in waiting, Canadian (but soon-to-be-Brit) Mark Carney has suggested in recent speeches that he favours a nominal (‘cash’) GDP target, a framework that has been suggested by other economics commentators in the past. While it is self evident that the previous policy regime did not serve us well (I have written previously that I believe the 2% CPI remit encouraged the MPC to set interest rates at a level that actively encouraged the build up of debt in the economy), I do not think that a nominal GDP target would serve us any better. Indeed, it could lead to even worse poli...