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.
Introducing the Agents’ scores  (708k)
(by Colin Ellis of the Bank’s Inflation Report and Bulletin Division and Tim Pike of the Bank’s Agency for the South East and East Anglia). Each month, the Bank’s twelve Agents make quantitative assessments of economic conditions as seen from their respective countries and regions. These scores provide numerical measures of the intelligence that the Agents gather from month to month, and cover some areas of the economy where there are no official statistics. The scores are also timely and some have a high correlation with subsequently published ONS data. As such, they can be useful indicators of the current economic conjuncture. This article examines the scores that have been used in the regular MPC process since 1997. From January 2006, the scores will be published on the Bank’s internet site.
Do financial markets react to Bank of England communication? (294k)
(by Rachel Reeves of the Bank’s Structural Economic Analysis Division and Michael Sawicki of the Bank’s External Monetary Policy Committee Unit). Communication by the Bank of England’s Monetary Policy Committee (MPC) can convey information to market participants about the economic and policy outlook. In an inflation-targeting framework, clear communication by the central bank has an important role in explaining interest rate decisions and in helping to anchor inflation expectations. This article explores how financial markets react to different forms of communication by the MPC. The article finds that markets react to collective forms of communication such as the MPC Minutes and Inflation Report. But reactions to what might be called individual forms of communication - speeches and testimony to parliamentary committees - are more difficult to discern. Compared with a similar study for the United States, the results for the United Kingdom are less pronounced.
Financial stability, monetary stability and public policy (151k)
(by Chay Fisher, System Stability Department, Reserve Bank of Australia and Prasanna Gai of the Bank’s Systemic Risk Assessment Division). The interplay between financial and monetary stability has received considerable attention in recent times, from policymakers and academics alike. This article reviews the broad themes that have emerged in the recent literature and highlights several key issues that merit attention by researchers. In particular, the optimal combination of instruments designed to achieve these twin goals of policy simultaneously remains a relatively underexplored area of research.
Share prices and the value of workers (400k)
(by Eran Yashiv, Bank of England Houblon-Norman Fellow). Is the value of workers in a company reflected in its share price? Traditional approaches suggest not. This article proposes an alternative: the workforce of the company can be seen as a collection of matches between workers and jobs. The company decides on forming matches, as well as on investment in physical capital, on the basis of its expectations of future profits, which also determine the share price. So there is a link between investment and hiring on the one hand and share prices on the other. This approach has implications for the analysis of share price movements, employment and investment.
Stabilising short-term interest rates (594k)
(by Seamus Mac Gorain of the Bank’s Foreign Exchange Division). This article describes how the Bank’s new arrangements for implementing the Monetary Policy Committee’s interest rate decisions should tie market interest rates more closely to the Committee’s official rate. In the new framework, banks and building societies will be able to hold an average level of reserves at the Bank over a month-long ‘maintenance period’. The article shows that the Bank’s commitment to adjusting the supply of reserves on the final day of the maintenance period should ensure that the market rate is expected to be on target on that day. It also describes how the ability of scheme members to run their reserve balances up and down from day to day in response to changes in market rates should mean that the rate expected on the final day of the maintenance period prevails over the rest of the period.
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