The second drawback is that a nominal income growth target would probably mean less to the average person than does an inflation target. One virtue of an inflation target is it provides people with a simple heuristic for forming their expectations of how fast prices will rise. That would be muddied under a nominal income growth target. The bottom line from all this is that I do not believe that a shift to a nominal income growth target would represent a major change in the regime. Most of the time, policy settings would probably be pretty similar. The main consequences would instead lie in how the MPC explained and justified its decisions. The same cannot be said of a shift to a target for the level of nominal income, as recently advocated by Michael Woodford.8 As the incoming Governor of the Bank of England, Mark Carney, explained in a recent speech,9 such a target would ensure that past control errors have to be subsequently corrected. Bygones are not bygones, in other words. In the current context, this is usually taken to mean returning nominal income to a continuation of its pre-crisis trend line. As Chart 3 reveals, the nominal income shortfall in the United Kingdom is presently very large – in excess of 15% in fact. Such history dependence in policy is potentially of value when private agents are sufficiently forward-looking and the regime is fully credible.
That could potentially create some turmoil for international markets including ours and in the process we could see some potential for dislocation which is why Sri Lanka has decided to reach out to multilateral agencies like the IMF and the World Bank to assist us in terms of sheltering or protecting the economy against any adverse developments that may occur in the near future as a consequence of any turmoil in international capital markets if and when US policy makers decide to raise interest rates. That is one hurdle we have to look at. The second hurdle I would say is the lack of a structural change the way international, particularly developed countries of the world, are managing their economic affairs. A lot of the changes that we have seen in the last 5 years has had to do with monetary policy and the aggressive easing of the monetary policy. But on the fiscal side, you haven’t seen any structural changes in countries like the United States and most European countries that took the world into the great recession in 2008 as a consequence of their housing  2  BIS central bankers’ speeches  bubbles. That structural change in terms of improving productivity, reducing the size of social security programs and retooling their economies to become more productive has still not started and until that happens we don’t have a sustainable basis for global growth to grow apace.