Research work published by the Bank
is intended to contribute to debate, and does not necessarily
reflect the views of the Bank or of MPC members.
Assessing the MPC’s fan charts  (885k)
(by Rob Elder of the Bank’s Inflation Report and Bulletin Division, George Kapetanios of the Bank’s Conjunctural Assessment and Projections Division and Tim Taylor and Tony Yates of the Bank’s Monetary Assessment and Strategy Division). The MPC places considerable weight on its economic forecasts when setting monetary policy. But there is inevitably uncertainty around the outlook for the economy, and to communicate this, the MPC publishes its projections as fan charts. This article discusses some of the issues that must be taken into account when assessing those fan charts, it reports a range of formal and informal tests of various aspects of the MPC’s fan charts, and it discusses developments in the economy that may have pushed outturns away from the MPC’s central projections. With only six years of fan chart projections that can be compared with outturns, the sample is too small to draw strong conclusions. But to date, at most forecast horizons, inflation and output growth outcomes have been dispersed broadly in line with the MPC’s fan chart bands. That suggests that the fan charts gave a reasonably good guide to the probabilities and risks facing the MPC.
Long-run evidence on money growth and inflation (675k)
(by Luca Benati of the Bank’s Monetary Assessment and Strategy Division). We investigate the correlation between inflation and the rates of growth of narrow and broad money in the United Kingdom since the 19th century. Empirical evidence points towards a remarkable stability across monetary regimes in the correlation for longer-run trends in the data, but some instability in the short to medium term. Additional evidence from the United States confirms the overall stability of the correlation for the longer-run trends.
The determination of UK corporate capital gearing (440k)
(by Peter Brierley of the Bank’s Financial Stability area and Philip Bunn of the Bank’s MacroPrudential Risks Division). This article seeks to explain the high current level of UK corporate capital gearing. It also explores the empirical relationship between gearing and a range of financial characteristics. Analysis of aggregate data suggests that the sharp rise in gearing between 1999 and 2002 cannot all be explained by an increase in its long-run equilibrium level, according to a model where that equilibrium is determined by the trade-off between the tax benefits of debt and the risks of financial distress. There are a number of factors not captured by that model that could have contributed to a sustainable increase in gearing. But on balance it seems that gearing has been above a sustainable level, causing firms to adjust their balance sheets by paying lower dividends and issuing more equity and perhaps by investing less than they otherwise would have done. Analysis of company accounts data suggests that gearing levels are persistent, positively related to company size and negatively correlated with growth opportunities and the importance of intangible assets. In the past, highly profitable companies had low gearing, but this relationship has broken down since 1995 as more profitable firms have increased their debt.
Publication of narrow money data: the implications of money market reform (286k)
(by Norbert Janssen of the Bank’s Monetary and Financial Statistics Division and Peter Andrews of the Bank’s Monetary Assessment and Strategy Division). The published M0 series comprises notes and coin in circulation and bankers’ operational balances at the Bank of England, with the latter accounting for a very small part of the whole. As part of the money market reforms to be introduced in 2006, banks and building societies will be able to hold interest-bearing reserve accounts at the Bank of England that will be much larger than their former operational balances. After the reform, the Bank plans to discontinue publication of M0 and instead publish separate series for notes and coin in circulation and banks’ and building societies’ reserves.
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