Summary of Quarterly Bulletin
Summer 2005

This article reviews developments since the Spring Quarterly Bulletin in sterling financial markets, UK market structure and the Bank's official operations.

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 impact of government spending on demand pressure (360k)
(by Bob Hills and Ryland Thomas of the Bank’s Structural Economic Analysis Division and Tony Yates of the Bank’s Monetary Assessment and Strategy Division). When assessing the outlook for inflation, the growth of real GDP is commonly used as an indicator of changes in current demand pressures. But as GDP includes the output of the government sector, this approach can in some circumstances be misleading. Government output is not necessarily an informative guide to the impact of government spending on the balance of demand and supply pressures in the marketed sector of the economy. Instead, it may be more informative to consider the quantity of resources that the government absorbs - that is, how much private sector output it buys and how much labour it hires - rather than the quantity of output it produces.

How important is housing market activity for durables spending? (393k)
(by Andrew Benito and Rob Wood of the Bank’s Structural Economic Analysis Division). The links between the housing market and consumer spending have been the source of much debate. In this article we examine the evidence for a link between housing transactions and consumer spending, which could exist if households were more likely to purchase some goods and services when they move home. Using survey data from the British Household Panel Survey we find that households are two to three times more likely to purchase certain durable goods when they move home. But those households that move home are a small proportion of all households: so in aggregate a change in housing transactions seems likely to have only a moderate impact on durables spending. Estimates of the extent of the overall effect are, however, subject to considerable uncertainty. Furthermore, any such link can only affect spending in the short run and cannot influence consumer spending in the medium term.

The inflation-targeting framework from an historical perspective (583k)
(by Luca Benati of the Bank’s Monetary Assessment and Strategy Division). This article provides an historical perspective on the post-1992 inflation-targeting regime in the United Kingdom. It assesses nearly 400 years of UK economic history using three alternative gauges of stability: business-cycle fluctuations, the Phillips correlation between inflation and unemployment and the degree of inflation persistence. The first of these measures suggests that the inflation-targeting regime has been characterised by the most stable macroeconomic environment in recorded UK history. The second points to a significant improvement in the stability of the Phillips inflation-unemployment correlation during the post-1992 period. The third stability measure suggests that inflation persistence in the United Kingdom has been the exception, not the rule.

Monetary policy news and market reaction to the Inflation Report and MPC Minutes (279k)
(by James Bell of the Bank’s Conjunctural Assessment and Projections Division and Rob in Windle of the Bank’s Sterling Markets Division). This article describes the results of analysis carried out as background for the speech ‘Inflation targeting in practice: models, forecasts and hunches’, by Rachel Lomax, Deputy Governor for Monetary Policy, which is reproduced in this edition of the Quarterly Bulletin. It examines the reactions of both economists and financial markets to different MPC announcements: the policy statement release immediately after the interest rate meeting; the Minutes of that meeting; and the Inflation Report. This article also examines whether the amount of perceived ‘news’ contained in interest rate decisions has changed since the MPC was established in 1997.

Addendum to Report on modelling and forecasting at the Bank of England (166k)
The Spring 2003 Quarterly Bulletin contained a report on modelling and forecasting at the Bank of England by Adrian Pagan. This article is a postscript to Professor Pagan’s original report, and covers the introduction of the Bank’s new macroeconomic model (the Bank of England Quarterly Model, or BEQM). The overall assessment is broadly positive, and the Bank would again like to thank Professor Pagan for the valuable insights that his report has provided.

Public attitudes to inflation (415k)
(by Colin Ellis of the Bank’s Inflation Report and Bulletin Division). Over the past five and a half years, NOP has carried out surveys of public attitudes to inflation on behalf of the Bank of England. As part of an annual series, this article analyses the results of the surveys from May 2004 to February 2005. Public opinion on most issues has changed little over the past year. One in five people - the largest group - thought inflation had been between 2% and 3%, and a similar proportion expected price increases in that range over the next twelve months. In February a majority of respondents expected interest rates to rise over the next year, but that was a smaller proportion than a year ago. Around 40% of people thought the economy would fare best if interest rates remained unchanged, and over half of the sample was satisfied with the way the Bank is setting rates. But there remained a lack of understanding about monetary policy in some demographic groups.

Chief Economist Workshop April 2005: exchange rate regimes and capital flows (142k)
(by Gill Hammond of the Bank’s Centre for Central Banking Studies and Ole Rummel of the Bank’s Monetary Instruments and Markets Division). The second annual Chief Economist Workshop, organised by the Bank of England’s Centre for Central Banking Studies (CCBS), brought together economists from more than 30 central banks. It was part of CCBS’s programme of events to provide a forum for central bankers and academics to exchange views on central bank policies and to share specialist technical knowledge. The topic for this meeting was exchange rate regimes and capital flows, with a special emphasis on the choice of an appropriate exchange rate regime within the domestic monetary, fiscal and financial framework.

Implementing monetary policy: reforms to the Bank of England’s operations in the money market (249k)
(by Roger Clews of the Bank’s Markets Area). In its money market operations, the Bank of England implements the interest rate decisions of its Monetary Policy Committee while meeting the liquidity needs of the banking system and thus contributing to its stability. The Bank has decided that it needs to upgrade the way in which it carries out these operations and has announced wide-ranging reforms to bring that about. This article describes the new system.

A review of the work of the London Foreign Exchange Joint Standing Committee in 2004 (123k)
This note reviews the work undertaken by the London Foreign Exchange Joint Standing Committee during 2004.