We have had an inflation rate of 2% for as long as I can remember, this is set by the Bank of England.
Mark Carney will shortly take his position as governor of the Bank of England and questioned whether his call for true fiscal adjustment put him out of line with the fund’s call for the UK authorities to consider easing up the pace of deficit reduction while demand remained weak, Mark Carney made it clear that he did not see the level of fiscal austerity as a major constraint on the Bank of England’s ability to stabilise the economy.
The American Federal Bank has recently produced a model for the last decade showing evidence that downward nominal wage rigidities have been an important force shaping the dynamics of unemployment, wage growth, and inflation. With the annual growth rate of nominal GDP being so important, it is a surprise that Mark Carney, has backed-away from his suggestion that targeting its value would help in a depressed environment.
The real problem here is that David Cameron and George Osborne didn’t give the Bank of England an NGDP target. Without that sort of explicit mandate, it’s awfully hard for George Osborne to suddenly shift Bank of England policy so radically. Perhaps the government felt that abandoning the 2% inflation target it would be too controversial, especially with Ed Balls insisting that the 2% target should be maintained.