Central Banks Discussed Nominal GDP Targets at G-20Scott Rose and Ilya Arkhipov
Group of 20 policy makers discussed a broad rethinking of monetary tools at their meeting in Moscow last week, including strategies to support growth by targeting nominal gross domestic product, Russia’s envoy to the G-20 said.
A proposal for the monetary authorities to adopt a target of nominal GDP, aired by Bank of England Governor-designate Mark Carney in December, was discussed on the sidelines of the G-20 meetings, said Russia’s G-20 sherpa, Ksenia Yudaeva. Russia holds the group’s rotating presidency this year.
“Maybe it’s an appropriate instrument for developed countries with reserve currencies, but for developing and small economies, it absolutely doesn’t answer their problems,” Yudaeva said in an interview in Moscow. “Inflation is more or less fine; even in Russia we can collect it on a weekly basis. Nominal GDP is published with big lags and big revisions.”
Officials in the U.K. have begun debating the need for a change in the system established in 1992, suggesting nominal GDP as a better target to give Carney and the central bank’s Monetary Policy Committee more scope to support growth. The introduction of a new mandate is a “very pretty concept, though in practice it’s entirely inoperable,” according to Yudaeva, a 42-year-old with a PhD in economics from the Massachusetts Institute of Technology who was previously a chief economist at OAO Sberbank, Russia’s biggest lender.
“There’s a very strong process of reconsideration of what appropriate monetary policy means for central banks,” said Yudaeva, who joined President Vladimir Putin’s administration last year as head of the Kremlin’s council of economic advisers. “If in the 2000s inflation targeting was considered the best policy, leaving interest rates as the only tool, now new instruments have emerged.”
Carney, who leaves the Canadian central bank June 1 to take over the BOE, has said he plans to oversee a “re-founding” of the institution, formed in 1694. He has discussed the possibility of shifting monetary focus to nominal GDP, as well as signaling more flexibility on meeting the regulator’s inflation target.
While central banks are pivoting away from accepted tools of monetary policy and embrace strategies that include asset purchases and capital controls, Russia has “no need to react yet,” Yudaeva said.
Russia, the largest emerging economy to increase interest rates last year, is planning to shift to inflation targeting by 2015. The country’s central bank was forced to abandon its target range of 5 percent to 6 percent for consumer price growth last year after a surge in global food prices.
Governments are turning to a new group of monetary-policy makers as nations run out of room to ease fiscal policy. The financial crisis that followed the collapse of Lehman Brothers Holdings Inc. in September 2008 forced the monetary authorities to weigh fresh strategies to jumpstart economic growth and sustain recoveries, Yudaeva said.
New Zealand’s central bank governor yesterday said he’s ready to intervene in foreign-exchange markets, adding to comments by officials from South Korea to South America warning their currencies are too strong, even as G-20 nations say they’ll refrain from competitive devaluation.
“The paradigm of what’s considered correct policy for central banks will change,” Yudaeva said. “We are seeing that.”
The International Monetary Fund in December endorsed nations’ use of capital controls in certain circumstances, marking a reversal of its historic support for unrestricted flows of money across borders.
Finance ministers and central bankers from G-20 nations pledged in a Feb. 16 statement not “to target our exchange rates for competitive purposes,” while refraining from singling out Japan for weakening its currency. After Japan’s leaders pledged steps to boost the economy that caused the yen to tumble, policy makers in South Korea and the Philippines are weighing curbs to capital inflows, while Norway’s central bank said it is ready to cut interest rates to counter the krone’s strength.
In the run-up to the G-20 meeting, Japan had been under fire for a drop in the yen. Group of Seven members roiled currency markets last week with takes on their own statement regarding attempts to manipulate currencies for competitive advantage.
“The question should remain at the center of the financial G-20’s attention,” Yudaeva said. “There should be further discussion, and perhaps the development of a code of conduct.”