Former MPC member Posen: Forward guidance no substitute for policy

This is not the hope you're looking for.

In a piece written for the CEPR pamphlet "Is Inflation Targeting Dead? Central Banking After the Crisis", former Bank of England Monetary Policy Committee member Adam Posen has dismissed the idea of forward guidance for monetary policy as a "gimmick".

Forward guidance is the idea that a monetary policy committee can pre-commit to a certain course of policy in order to drive outcomes in the direction they want. It's a particularly trendy idea right now, driven, Posen writes, "by the question about whether central banks should be explicitly focusing on GDP (or unemployment) as well as inflation".

If forward guidance works as it should, then a bank can boost the economy by assuaging fears amongst investors that monetary policy will be tightened shortly. Armed with that guidance, they will (ideally) go off and take actions which strengthen the economy, which they may not have taken if they were expecting an imminent rise in interest rates.

But Posen points out that that rarely happens. He cites three examples, in Canada, Sweden and the US, where forward guidance has been issued, but later statements from the central bank have served to instil doubt in the markets. For instance, in the US:

The Federal Reserve recently embraced a version of pre-commitments when the FOMC announced in November 2012 that they were switching to a ‘thresholds model’. Namely, they would not raise rates until unemployment fell unless the inflation threshold was violated.
I think that was the right stance of policy. Then we saw the next month, based on some comments in the minutes from the FOMC meeting, the market sold off.

His evidence is backed up by the fact that in the UK – where pre-commitment is explicitly foresworn – "the impact of quantitative easing was very closely comparable… to that of the US". As a result, Posen, writes, "the bottom line lesson… is that talk is cheap."

Of course, it may still be the case that in some hypothetical situation where the central bank managed to release a series of statements which were all consistent with the forward guidance in the eyes of the market that the policy would have the desired effect. But, he argues, "believing that jawboning had some effect is not the same as believing that it is an independent tool of monetary policy with a lasting and credible effect."

The intervention may come as a disappointment to incoming Bank of England governor Mark Carney. Posen explicitly calls out Carney for placing too much faith in forward guidance, and attributes it to "frustration – the lack of recovery despite massive monetary-policy shifts." It's certainly true that many of Carney's supporters are hoping that this will be the policy shift which actually works, but Posen provides a hope of his own:

The fact is we could have pursued more aggressive monetary policy, achieved better goals and been totally consistent with the current inflation target…

Forward guidance is no substitute for sufficient policy action.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.