Summary of Quarterly Bulletin
Spring 2002
Each article is available
as a separate pdf file; click on the appropriate title to
access the relevant file. Alternatively you may download the
complete issue 
(1.8M). |
|
| Markets
and operations
(360k) |
This article reviews developments in international and domestic financial markets, drawing on information from the Bank of England's market contacts, and describes the Bank's market operations in the period 26 October 2001 to 15 February 2002. |
| Report | The
London Foreign Exchange Joint Standing Committee: a review
of 2001
(39k) The Foreign Exchange Joint Standing Committee (FXJSC) was established in 1973 under the auspices of the Bank of England, largely as a forum for banks and brokers to discuss broad market issues. The membership of the Committee has grown over the past two years and now includes senior staff from many of the major banks operating in the foreign exchange market in London, as well as brokers, corporate users of the foreign exchange market, and the Financial Services Authority (FSA). The FXJSC met six times in 2001. For most of the year the main focus of the Committee's work was the completion of the London Code of Conduct for Non-Investment Products (NIPS). In the latter months of the year, and partly prompted by the terrorist attacks of 11 September in the United States, the Committee considered whether the London market should form a group to focus specifically on operational issues in the foreign exchange market. The Committee also discussed the impact of e-commerce developments, which will be a recurring theme of discussions during 2002. |
| Research and analysis |
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. Provision of finance
to smaller quoted companies: some evidence from survey responses
and liaison meetings
(114k) (by Hasan Bakhshi and Jamie Thompson of the Bank's Structural Economic Analysis Division). The ratio of business investment to GDP at constant prices has been trending upwards over the past two decades, picking up sharply in the second half of the 1990s. This article investigates possible explanations. We argue that the rise largely reflects a sustained fall in the relative price of investment goods, given that there is little discernible trend in the current-price ratio. This is consistent with a significant role for rapid technological progress in the investment goods sector and, given the importance of imported investment goods, for exchange rate developments in explaining trends in UK firms' investment behaviour. But other factors, such as falls in the cost of finance and increases in replacement investment, may also have been important. This view is supported by an illustrative model-based analysis. Building a real-time database for GDP(E)
(83k) (by Jennifer Castle of Oxford University and Colin Ellis of the Bank's Structural Economic Analysis Division). The Bank's Monetary Policy Committee analyses a wide variety of data to inform its monetary policy decisions. One of the main questions raised by new data is how much weight should be placed on initial estimates that are likely to get revised. Economic policy decisions must take account of possible revisions to the data that are used to inform the assessment of the current state of the economy. In attempting to improve our understanding of how data are revised, we have constructed a real-time database that contains successive sets of data for a number of different series. This article discusses the construction of the database for the major components of the expenditure side of gross domestic product (GDP) in the UK National Accounts. Electronic trading in wholesale financial markets: its wider impact and policy issues
(75k) (by Helen Allen of the Bank's Market Infrastructure Division and John Hawkins of the Bank for International Settlements). Electronic trading is transforming financial markets. It can reduce costs, extend participation and remove many physical limitations on trading arrangements. It allows much greater volumes of trades to be handled, and permits customisation of processes that until recently would have been technically impossible or prohibitively expensive. It is a major force for changes in 'market architecture'-the key features of market structure such as participation arrangements, venues and trading protocols. These effects of electronic trading in turn have a real influence on the prices and quantities that result from the trading process. And they can also affect aspects of a market's 'quality'-its performance across attributes such as liquidity, trading costs, price efficiency and resilience to shocks. This matters because market quality has broader welfare implications-such as through the contribution of the efficiency of the financial system to economic growth and through the performance of markets and their resilience to financial instability. So the impact of electronic trading is of considerable interest to market participants and policy-makers alike. Many recent changes in securities market arrangements are closely associated with the effects of electronic trading (and wider technological innovation). Some market features that have lasted for years now seem to be changing. There are now choices to be made in market design in areas that were previously dictated by physical limitations. This article highlights some areas where electronic trading has had a particular impact on trading arrangements and discusses policy questions that arise. Analysts' earnings forecasts and equity valuations
(116k) (by Nikolaos Panigirtzoglou and Robert Scammell of the Bank's Monetary Instruments and Markets Division). Equity valuations are important for monetary policy makers as the factors that drive equity valuations may contain information about the future course of the economy. Moreover, a possible correction in equity prices may be a source of shocks to which monetary policy may have to react. Such an equity market correction may also have negative implications for financial stability. We use a three-stage dividend discount model to see whether analysts' forecasts can explain the level of equity prices over the past ten years. This model is also used to decompose equity returns into changes to earnings, the yield curve and equity risk premia. On market-based measures of inflation expectations
(124k) (by Cedric Scholtes of the Bank's Reserves Management, Foreign Exchange Division). Prices of index-linked financial securities provide market-based measures of inflation expectations and attitudes to inflation risk. In the United Kingdom, 'breakeven' inflation rates derived from index-linked and conventional gilts reflect investors' forecasts of future inflation, and also act as a barometer of monetary policy credibility. Implied breakeven inflation rates are a useful alternative to surveys and econometric forecasts, and are regularly presented to the Bank's Monetary Policy Committee to inform its assessment of economic conditions. This paper outlines the technical and institutional factors that complicate the interpretation of UK breakeven inflation rates. Looking at data, we find that inflation expectations have fallen considerably since the adoption of inflation targeting and that UK monetary policy credibility is considerably stronger since the Bank of England was granted operational independence. Equity wealth and consumption-the experience of Germany, France and Italy in an international context
(108k) (by Ben Norman, Maria Sebastia-Barriel and Olaf Weeken of the Bank's International Economic Analysis Division). Consumption in Germany, France and Italy (the EU3) has generally been thought to be less responsive to wealth effects than in the United Kingdom or the United States. The aim of this article is to assess the evidence for changes in the responsiveness of EU3 consumption to changes in equity prices, given the rapid increase in share prices in recent years and the rising share of financial assets held in equities during the 1990s. |
