The Monetary Policy Committee of the Bank of England: ten years on  (850k)
Compared to past performance, UK inflation has been low and unusually stable since the inception of inflation targeting, while GDP growth too has been remarkably stable. In part that reflects the effectiveness of the inflation-targeting framework and the current institutional arrangements, particularly by anchoring inflation expectations and reducing the sensitivity of inflation to demand and cost shocks.
But other factors have also provided a benign context for the MPC's efforts: cheaper imports and increased competitive pressures associated with globalisation; and increases in labour supply, associated in part with inward migration. Both have dampened inflationary pressures and reinforced the changes in the inflation process associated with the change in monetary regime. The environment is unlikely to be so benign in the future.
The submission also covers the impact on monetary policy of a number of particular issues that have been relevant to the MPC's deliberations over the past decade: the balance of demand and the exchange rate; money supply and liquidity; asset prices; household debt; and investment.
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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.
The macroeconomic impact of globalisation: theory and evidence (606k)
(By Morten Spange of the Bank's Monetary Assessment and Strategy Division and Chris Young of the Bank's International Economic Analysis Division). The integration into the world economy of labour-abundant economies - such as China, India and Eastern European countries - has had far-reaching effects. This is of interest to policymakers, who need to understand the channels by which globalisation is affecting the macroeconomy. This article uses an economic framework to analyse globalisation. It outlines the impact predicted by an economic model on key macroeconomic variables such as interest rates, wages and relative prices. The article then compares these predictions with the evidence, and finds that although many macroeconomic variables have responded as projected, some - in particular real interest rates and current accounts - have not.
The macroeconomic impact of international migration (542k)
(By Richard Barwell of the Bank's Conjunctural Analysis and Projections Division). Net inflows of migrants have accounted for the majority of UK population growth over the past decade. Migrants who travel to the United Kingdom to work increase the supply of labour to UK companies, and indirectly encourage them to invest in more machinery and equipment, thereby boosting the supply capacity of the economy. Migrants also add to the level of demand in the economy. The issue for monetary policy makers tasked with maintaining control of inflation is how migration affects the balance between demand and supply, and that is likely to depend on the nature of the migrant inflow. Recent migrant inflows appear to have had a slightly larger impact on supply than demand, and may therefore have depressed inflationary pressures in the economy.
Potential employment in the UK economy (670k)
(By Richard Barwell, Venetia Bell and Philip Bunn of the Bank's Monetary Analysis Division, and Maria Gutiérrez-Domènech formerly of the Bank's Monetary Analysis Division). This article discusses a range of factors that may shift the level of UK potential employment - that is, the amount of labour that can be sustainably employed by UK companies to produce goods and services. The level of potential employment reflects four factors: the size of the adult population; the willingness of that population to participate actively in the labour market; the sensitivity of wages to the unemployment rate; and the average number of hours that people are willing to work when employed. Rapid growth in the UK population has been the primary source of growth in potential employment over the past ten years. Structural changes in the labour market are likely to have also enabled a modest increase in the equilibrium participation rate and a decline in the equilibrium unemployment rate which would have further boosted potential employment. But those developments have been partly offset by the continued downward trend in desired working hours.
The role of household debt and balance sheets in the monetary transmission mechanism (451k)
(By Andrew Benito, Visiting Scholar, International Monetary Fund, Matt Waldron, Garry Young and Fabrizio Zampolli of the Bank's Monetary Assessment and Strategy Division). There is considerable uncertainty about the effect of household debt on the macroeconomy and its role in the monetary transmission mechanism. This article summarises conclusions from recent Bank of England research aimed at shedding light on this issue. It argues that the extent to which levels of household debt affect the outlook for the economy and the way in which the economy responds to unexpected developments, depends on the circumstances of individual borrowers and lenders, as well as wider economic conditions. Recent evidence suggests that there has been little difference in the amount by which the spending of high and low debt households has responded to changes in those households' financial position. This is likely to be because the benign economic environment and favourable lending conditions have made it easier for households to smooth over adverse shocks. Nevertheless, adverse interactions between debt, house prices and consumption could arise in other circumstances. As such, there is a need to keep this situation under review by continued monitoring of household and lender balance sheets.
Gauging capacity pressures within businesses (554k)
(By Colin Ellis and Kenny Turnbull of the Bank's Monetary Analysis Division). This article discusses the measurement of capacity pressures within businesses - a key influence on the outlook for inflation. The degree of pressure on capacity relative to normal is likely to affect businesses' costs and prices. A variety of different methods are presented, each with their own advantages and drawbacks. Ultimately, no measure of capacity pressure is perfect, and the policymaker's judgement is crucial. |
