Tuesday, February 23, 2010
Tucker on bubbles and new tools
Posted by David Smith at 02:30 PM
Category: Thoughts and responses

On a day when several members of the Bank of England's monetary policy committee (MPC) have spoken in evidence to the Commons Treasury committee - and have been mostly downbeat - Paul Tucker, the deputy governor, has also given a speech.

It is an interesting one. Monetary policy did not actually create asset price bubbles but, as he put it: "The suggestion that I have heard most frequently from thoughtful market participants is not that monetary policy was directly responsible for the bubble, but that it contributed to an appreciation of asset prices which then got out of hand."

He also points out that warnings in the past from the Bank and others about the threat to financial stability could be safely ignored by participants because there were no tools to back them up. That should change in the future.

On spare capacity, where he uses the term "effective supply", he said this: "Supply conditions are going to depend heavily on the path of aggregate demand. If demand recovers robustly, firms are likely to bring some capacity back on line. If, on the other hand, demand proves anaemic, then suspended-capacity is more likely to be permanently scrapped. Under the first scenario, inflationary pressures could be weaker than would otherwise be the case in a recovering economy. Under the latter scenario, inflationary pressures would be greater than otherwise in a stalled economy. I do not want to go so far as saying that the path of aggregate demand won’t affect inflation, but it may not be quite as potent as usual."

It is clear which path is more desirable. The speech is here.