Wednesday, May 02, 2007
Ten years of the MPC
Posted by David Smith at 06:30 PM
Category: Thoughts and responses


In a speech to the Society of Business Economists Mervyn King, the Bank of England governor, looked back on ten years of Bank independence, lauding the economy's much-improved stability since 1997. Here's the Bank's press release, and the speech itself can be accessed here.

In a lecture in London to the Society of Business Economists to mark the tenth anniversary of the Monetary Policy Committee, Mervyn King, Governor of the Bank of England, examines the improvement in the UK’s economic performance over the past 10 years and the role played in that by the MPC.

He discusses the changes in the UK economy over the past decade and considers the challenges to the MPC for the next ten years, asking what can be learnt from the experience of the first decade to help it to improve over the next. In particular he examines the role of money and credit in the MPC’s analysis of the economy and also the MPC’s communications and how they can be improved.

He concludes: “There has been a sea change in the way monetary policy is conducted in the UK. That is evident in the changing dynamics of inflation and in the stability of the economy more generally. It is not, I believe, credible to dismiss that solely as the result of luck.”

“All this amounts to a revolution in the way interest rate decisions are made in this country. It is hard now to imagine policy being set in any other way.”

Mr King adds: “The crucial achievement of the MPC is to have anchored inflation expectations. But, as the saying goes, we are only as good as our last meeting. …There is no more important challenge than keeping inflation and inflation expectations anchored on the target.”



I was interested to read King's speech. In it I notice that he remarks upon the view, common among monetary policy academics, that policy errors will appear in inflation expectations, demand, or market interest rate data, so that broad money data tells us nothing extra. He gives three reasons for dissenting: (1) we can't observe business and employee expecations [NB. I find the employee claim a bit odd - what about wage data?]; (2) people face liquidity contstraints to which money and credit availability make a difference; and (3) many effective market interest rates are not observable.

I am interested in whether you agree with his critique of this view?

I am also interested that he did not include what I have often argued to be the key factor - that there are multiple equilibria here, and that the monetary data can indicate to us the implicit promises the MPC is being accepted by the Market to have made as to future policy (e.g. when monetary growth is high but inflation expectations don't rise, that is because the Market expects the MPC to raise rates "later" - though there might still be sufficiently many possibilities for what "later" means that no clear picture emerges from observable interest rate futures). I wonder why he does not seem to agree with this thought...?

Posted by: Andrew Lilico at May 3, 2007 12:34 PM

Seems a bit circular to me so, for example, if there are constraints on money and credit availability, that will also be reflected in the broad money data. And inflation expectations are pretty well observed in survey data, as well as in wages.

Your point is an interesting one - the reason the markets appear to accept the MPC's implicit promises could be that they are focusing purely on its reaction function rather than thinking about what broad money growth might mean for inflation in the medium-term.

Posted by: David Smith at May 3, 2007 08:27 PM


As a student at the University of Manchester, I am currently researching the MPC and their impact on the UK economy since 1997.

To what extent do you feel that the stable inflation rate can be attributed to the MPC? It seems to me that it is hard to measure because the MPC have not been tested to date and also the time lag between their decisions and the impact is so great that it is hard to be objective.

Your thoughts would be greatly appreciated.

Many thanks

Phil Randerson

Posted by: phil randerson at November 7, 2007 06:51 PM