Quarterly Bulletin
Monetary Policy Committee Articles

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.

The Kohn report on MPC procedures (80k)
Report to the non-executive Directors of the Court of the Bank of England on monetary policy processes and the work of Monetary Analysis, prepared by Donald L Kohn on 18 October 2000. Followed by the Bank of England response to the Kohn Report
(32k)

The transmission mechanism of monetary policy
(56k)
This report has been prepared by Bank of England staff under the guidance of the Monetary Policy Committee in response to suggestions by the Treasury Committee of the House of Commons and the House of Lords Select Committee on the Monetary Policy Committee of the Bank of England.

The Monetary Policy Committee (MPC) sets the short-term interest rate at which the Bank of England deals with the money markets. Decisions about that official interest rate affect economic activity and inflation through several channels, which are known collectively as the 'transmission mechanism' of monetary policy.

The purpose of the paper is to describe the MPC's view of the transmission mechanism. The paper is in two parts.

Part I describes the links from official interest rate decisions to economic activity and inflation. It discusses aspects of these links such as the distinction between real and nominal interest rates, the role of expectations, and the interlinking of many of the effects mentioned. There is also a discussion of the role of monetary aggregates in the transmission mechanism.

Part II provides some broad quantification of the effects of official interest rate changes under particular assumptions. There is inevitably great uncertainty about both the timing and size of these effects. As to timing, in the Bank's macroeconometric model (used to generate the simulations shown at the end of the paper), official interest rate decisions have their fullest effect on output with a lag of around one year, and their fullest effect on inflation with a lag of around two years. As to size, depending on the circumstances, the same model suggests that temporarily raising rates relative to a base case by 1 percentage point for one year might be expected to lower output by something of the order of 0.2% to 0.35% after about a year, and to reduce inflation by around 0.2 percentage points to 0.4 percentage points a year or so after that, all relative to the base case.

The Bank's use of survey data (66k)
(by Erik Britton of the Bank's Structural Economic Analysis Division, and Joanne Cutler and Andrew Wardlow of the Bank's Conjunctural Assessment and Projections Division). The Bank of England's Monetary Policy Committee (MPC) is charged with the task of achieving the Government's inflation target. A central part of this task involves interpreting information about the current state of the UK economy, and assessing its medium-term prospects. Surveys form part of the broad range of information available to the MPC, along with official statistics, data from financial markets, and the information provided by the Bank's regional Agencies. In this sense, surveys complement other sources of information. But importantly, the forward-looking nature of many survey responses means that they often provide information that is additional to official and other sources of data.

This article outlines how Bank staff use state-of-trade type surveys: as a timely indicator of forthcoming official data; as an independent cross-check on official data and other information; as forward-looking information on the economy, particularly up to the short-term horizon; and to provide additional information to explain economic behaviour. It discusses a variety of approaches the Bank uses to assess survey information, and to identify news about the economy. The article outlines how simple observation can be useful, and explains how qualitative survey information is transformed into quantitative estimates and how incremental news might be extracted from surveys. The approaches described illustrate how surveys help the MPC to interpret economic conditions, and resolve puzzles and uncertainties about the economic outlook.

Surveys complement official and other information; they are not a substitute for it. Many surveys are based on smaller, and less representative, samples than the official statistics. So they may be subject to bias, or to a higher degree of measurement error than the official data. The MPC has to form a judgment based on all available information, of which survey evidence is one valuable source. The techniques described reflect the Bank's aim to use this evidence as systematically as possible to inform the MPC's policy decisions.