Summary of Quarterly Bulletin
November 1996

Research work published by the Bank is intended to contribute to debate, and is not necessarily a statement of Bank policy.

Interpreting sterling exchange rate movements (68k)
(by Mark Astley and Anthony Garratt of the Bank's Monetary Assessment and Strategy Division).
This article considers the analysis and interpretation of exchange rate fluctuations. It stresses the importance of identifying the sources of exchange rate movements, and recognising the many channels through which they can affect consumer prices. It reports empirical results which confirm that there is no simple relationship between the exchange rate and inflation. Sterling exchange rate depreciations are not necessarily associated with rises in UK consumer prices relative to prices overseas. In particular, UK prices may fall relative to those overseas if the depreciation is caused by increases in aggregate supply or falls in real spending, but rise if it is caused by increases in the money supply.

The demand for Divisia money by the personal sector and by industrial and commercial companies (44k)
(by Norbert Janssen of the Bank's Monetary Assessment and Strategy Division).
This article updates previous Bank analysis of Divisia money. It assesses the demand for Divisia money by the personal sector and by industrial and commercial companies (ICCs). Divisia money weights the component assets of M4 according to an estimate of the transactions services they provide. As an index of total liquidity in the economy Divisia might therefore be more closely related to spending than simple-sum monetary aggregates. The article concludes that a sectoral analysis of Divisia money can contain important information about future spending.

International monetary policy co-ordination: some lessons from the literature (30k)
(by Charles Nolan and Eric Schaling of the Bank's Monetary Assessment and Strategy Division).
This article provides a brief survey of the academic literature on monetary policy co-ordination. Particular attention is given to identifying any guidance it may offer on how best to arrange the nominal framework between EU countries in the run up to, and following, EMU.

The external balance sheet of the United Kingdom: recent developments (60k)
(by Andrew Clayton of the Bank's Monetary and Financial Statistics Division).
Continuing the annual series which began in 1985, this article describes the principal influences on the external asset position of the United Kingdom arising from capital flows and from the impact of valuation changes to existing assets and liabilities. The article includes an international comparison of external asset positions and reviews developments in the United Kingdom's net investment earnings from abroad. It also describes the preparation for an internationally co-ordinated survey of cross-border holdings of portfolio assets, and recent evidence of the scale of UK-based repo business in foreign securities.

Public sector debt: end-March 1996 (72k)
(by Nick Parish of the Bank's Monetary and Financial Statistics Division).
This article continues the annual series analysing the public sector debt position and the composition and distribution of the national debt. In 1995/96, the nominal value of the net debt of the public sector rose by around £33 billion, while market holdings of the national debt rose by around £38 billion. As a proportion of GDP, these measures increased by 2.7 and 3.4 percentage points respectively, to 44.6% and 47.5%. In the twelve months to the end of March 1996, the ratio of general government consolidated gross debt to GDP (calculated on a Maastricht basis) rose by 3.3 percentage points to 53.8%, remaining well below the 60% reference level specified in the Maastricht Treaty.

How should central banks reduce inflation? - conceptual issues (131k)
In a paper prepared for the Symposium on 'Achieving Price Stability' sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Mervyn King, Executive Director and Chief Economist of the Bank of England discusses how quickly a central bank should reduce inflation to its desired level following an inflationary episode. He argues that a central bank is unlikely to wish to move immediately to price stability, since there are costs to disinflation and these costs increase more than proportionally with the rate of disinflation. These costs, which arise because economic agents have to learn about the central bank's commitment to price stability, also mean that a central bank may wish to react to shocks to output as well as to inflation. But Mervyn King stresses that any such response should be cautious in the period in which the private sector is still learning about the central bank's commitment to price stability.

Developing voluntary domestic markets for government debt (53k)
For the Bank of England's 1995 Central Bank Governors' Symposium, Max Fry, Charles Goodhart and Alvaro Almeida surveyed the objectives, activities and independence of central banks in developing countries. One striking finding was that developing countries suffered considerably higher inflation than the OECD countries. While the proximate cause was more rapid money growth, their work suggested a more fundamental cause was that developing country governments resorted to their central banks much more for deficit financing. For the Bank of England's 1996 Central Bank Governors' Symposium, Max Fry was asked to investigate in more detail the ways in which governments finance their deficits.

Financial Stability Review-a profile of the new publication (9k)
The Bank, in association with the Securities and Investments Board, launched a new publication, the Financial Stability Review, at the end of October. The Review will highlight developments, whether in the United Kingdom or overseas, which might affect the stability of the financial system. It will also promote the latest thinking on risk, regulation and market institutions, as well as providing a forum in which ideas about regulatory change can be debated dispassionately.