Summary of Quarterly Bulletin
August 1996

Research work published by the Bank is intended to contribute to debate, and is not necessarily a statement of Bank policy.

The industrial impact of monetary policy (81k)
(by Joe Ganley of the Bank's Markets and Trading Systems Division and Chris Salmon of the Bank's Monetary Assessment and Strategy Division).
This article investigates the disaggregated effects of monetary policy on the output of 24 sectors of the UK economy. The purpose of the analysis is to identify the speed and magnitude of firms' reactions in these sectors to an unexpected monetary tightening; and to examine whether these responses provide any evidence on the transmission mechanism of monetary policy. The results indicate that the sensitivity of output to changes in monetary conditions differs markedly across industries.

Simple monetary policy rules (51k)
(by Alison Stuart of the Bank's Monetary Assessment and Strategy Division).
This article describes two simple rules, the McCallum rule and the Taylor rule, that could in principle be used to guide monetary policy. It then applies the rules to past UK data. In the United Kingdom, monetary policy decisions are based on a thorough assessment of the prospects for inflation rather than on one simple rule or single indicator. But simple rules can have a useful complementary role alongside all the other information within a pragmatic approach to monetary policy.

Probability distributions of future asset prices implied by option prices (233k)
(by Bhupinder Bahra of the Bank's Monetary Instruments and Markets Division).
The most widely used measure of the market's views about the future value of an asset is the mean or average price expectation-a point estimate. This article shows how this information set can be extended by using option prices to estimate the market's entire probability distribution of a future asset price. It also illustrates the potential value of this type of information to the policy-maker in assessing monetary conditions, monetary credibility, the timing and effectiveness of monetary operations, and in identifying anomalous market prices. Finally, the article looks at the limitations in data availability and details some areas for future research.

Expected interest rate convergence (22k)
(by Neil Cooper and Jim Steeley of the Bank's Monetary Instruments and Markets Division).
In the previous edition of the Quarterly Bulletin, the authors described the method underpinning the Bank's approach to estimating yield curves for the G7 countries. This article presents an economic application of these curves. It looks at estimated forward rate curves for pairs of countries, in order to assess the interest rate differentials that bond market participants expect to occur at different times in the future. Although the prospect of EMU may account for expected interest rate convergence among some of these countries, there are other factors that could also explain the observed interest rate differentials.

Payment and settlement strategy (13k)
The Bank of England announced in November last year that it proposed to review, with market participants and other interested parties, the strategic requirements for payment and settlement for UK financial markets. The review was conducted during the first half of this year and this note summarises its findings. It was presented by the Governor to the City Promotion Panel on 3 July.

Practical issues arising from the single currency (30k)
The Bank intends to publish a broadly quarterly series of papers as part of its efforts to ensure that the practical issues arising from the single currency, whether the United Kingdom is inside or outside the euro area, are fully understood and appropriate action is taken. This paper was originally prepared for the House of Commons' Select Committee on the Treasury, and subsequently made publicly available on 10 May. It reports the outcome of the Bank's discussions with banking and other sectors in the United Kingdom in the period up to May.