climbing the public engagement ladder speech given by andrew g haldane chief economist bank of england royal society for the encouragement of arts, manufactures and commerce ( rsa ) 6 march 2018 the views expressed here are not necessarily those of the bank of england or the monetary policy committee. i would like to thank shiv chowla for his help in preparing the text. i would like to thank michael anson, ben broadbent, mark carney, clare macallan, emma murphy, jennifer nemeth, mette nielsen, dave ramsden and ratidzo starkey for their comments and contributions. all speeches are available online at www. bankofengland. co. uk / speeches i am delighted to be here to discuss the final report from the rsa citizens ’ economic council on “ building a public culture of economics ”. this is the culmination of a two - year project, working with around 250 citizens and a number of organisations from across the country, including the bank of england. i would like to congratulate matthew taylor, chief executive of the rsa, and reema patel, kayshani gibbon and tony greenham from the rsa as leaders of the project, for their terrific work in pulling this together. it is an impressive, progressive and ambitious agenda for the economy and for economic policymakers like me. of course, citizens do already have a crucial stake in the economy. as economists we often divide the world into neat institutional packages – companies, governments, trade unions, charities. while useful organisationally, these names are no more veils, part legal, part social. behind the veil lies the ultimate owner – citizens, whether as workers, customers, shareholders, stakeholders or voters. institutions are executive gatekeepers of these citizen democracies. ultimately, it is citizens to whom policymakers, economic and otherwise, are accountable. those of us in the policy game need never to lose sight of that. despite those ownership rights, it is nonetheless the rsa ’ s contention that citizens are not at present engaged in the economy, and in economic policy, as fully as would be desirable. they make the case for moving to a deliberative democracy, one in which citizens have a greater say on matters economic and financial. this is a big contention. nonetheless it is one that i – as a citizen and as someone who works for one of those institutional veils, the bank of england – fully accept. more than that, the bank is

. that may also reflect a more volatile environment for real wages shocks ( i. e. to the terms of trade and productivity ). nor are floating exchange rates a guarantee of stable inflation : during the 1970s and 1980s, when there was no stable nominal target at all, this correlation rose to 0. 9. but inflationary shocks appear better contained with a domestic inflation target than an exchange rate or commodity peg. bis central bankers ’ speeches chart 13 inflation more persistent under fixed exchange rates chart 14 uk inflation persistence fell after introduction of inflation targeting 1. 6 estimated coefficient in regression of uk inflation on lagged inflation, 20 year rolling window consumption deflator 1. 2 gdp deflator 0. 8 0. 4 0. 0 source : bordo and eichengreen ( 1999 ), imf and oecd. note : blue shaded area represents + / - 2sd around diamond central estimate of a panel regression ; sample 1960 - 2010. source : ons and hills, thomas, dimsdale ( 2010 ). conclusion : policy should be flexible but don ’ t over - react to low inflation we ’ ve heard a lot about the risk that deflationary expectations persuade people to defer spending. we ’ ll no doubt hear it again if inflation were to dip below zero over the next couple of months. but it ’ s at best a partial point. all else equal, the incentive to save depends not on inflation expectations per se but on how far away they are from the nominal interest rate, i. e. the real interest rate. by any measure – even if you use the near - term household surveys as measure of inflation expectations – the real rate is extremely low, and still negative ( chart 15 ). the extensive empirical evidence for this “ inter - temporal substitution ” channel is in any case relatively weak – as the governor pointed out recently, the more important threat, particularly in developed economies with large balance sheets, is debt deflation. and in that regard, it ’ s the gap between interest rates and nominal income growth that matters. notably, nominal income growth has not declined of late. real interest rates still need to be low. our inflation target is 2 % not zero : what makes the current position “ good ” is not low inflation per se but the fact that, in this particular instance, it ’ s been caused by something ( a drop in oil prices ) that improves real incomes. even though the direct effect of that decline will drop out of the annual comparison