| Editorial |
| This issue of the Journal has something of the character of an Owner’s Manual for those with high-mileage policies that have started to give trouble. There is advice about what to make of the creaks from the banking system from David Mackie and about how best to steer it from Tim Congdon and Ben Broadbent, a teach-in from Eugen Mihaiti and David Smith for those scratching their heads over political and economic institutions that have seen better days, a reminder from Norman Record of how they worked when policies for the economy were first made after the Second World War, and, to help all us would-be mechanics, the introduction of a new toolbox devised by Professor Hendry and his colleagues. |
| Then there is, of course, the bill. Simon Mansfield presents the Society’s annual salary survey. It shows that policy advice is dearer this year, with salaries and other financial rewards for business economists both higher on average than last year. But the gains were far from uniform and there were straws in the wind of a less rosy future with lower bonuses for many in the City. |
However, first we have David Mackie’s essay on central bank com-munications, which was short-listed in this year’s Rybczynski Prize competition. He observes that in a world where central banks have become more independent of political control they have become more open about their aims and policies, and as they have focused on price stability as their primary objective, what they have to say may be of critical importance to inflationary expectations.
It is a thought which has also occurred to the Governor of the Bank of England who devoted a part of his Lecture to the Society last year to the subject and, indeed commissioned a survey of our members about their views on the Bank’s communications. He certainly believed the Bank’s communications were important in pursuing its aims, but drew the lesson that economists in forming their views on future interest rates placed more weight on the data and less on what the Bank had to say. Mackie’s analysis broadly supports that conclusion. He examined the differences between the approaches of ten major central banks to communication about policy- making, and tested them against differences in their achievements in reducing the errors in the forecasts of interest rates implied by forward market rates.
He finds only a weak link between communication and better anticipation of central bank policies, and suggests that, while some changes may be worthwhile in their own right, central banks should not expect them to "generate big declines in the forecast errors" made by financial markets. |
If communication is not the answer to more effective monetary policy, might it be found in a renewed emphasis on the role of money? In Speakers’ Corner we report a debate between Tim Congdon and Ben Broadbent on that proposition. For Congdon it seemed self-evident that it should. He argued that it was a necessary implication of the general equilibrium analysis that changes in money supply would bring about changes in money incomes which in the long run would reduce to changes in the general level of prices, and there was extensive evidence from many countries to support this analysis.
Any central banks that aimed at stable prices and stable financial markets simply had to have regard to monetary developments. In reply Broadbent did not attempt to deny the fundamental propositions that Congdon advanced, but he argued that the relationship between financial and non-financial markets was much looser than Congdon suggested, with the demand for money subject to significant shocks and spending power created outside the banking system. Changes in money supply did not provide enough additional information to guide setting interest rates in practice. Sadly, the debate reached no conclusion. |
A similar lesson was among those offered by Eugen Mihaita and David Smith, who suggest that while Britain’s prospects were less good than many think, Germany’s had improved remarkably, and that Britain could learn from the contrast. In particular they point to the deterioration in Britain’s fiscal position just as Germany and others in the Eurozone had retrenched, so that Britain was now particularly vulnerable to the adverse effects of any economic downturn. In monetary policy a Britain where trade deficits have been growing and asset prices ballooning – classic signs of suppressed inflation – could learn with advantage from the attention to a ‘monetary pillar’ of policy-making that the ECB has inherited from the Bundesbank. The sophistication of German industry, its commitment to innovation supported by substantial investment, and the skills of its workforce have helped improve Germany’s global competitiveness position even as Britain’s has slipped. Mihaita and Smith recognise that some of the historical and institutional reasons for this are not easily transplanted, but they see much that Britain could follow to improve relative costs.
They even argue that while Germany has been trying to reduce regulation in labour markets Britain has been adding to the burdens on employers, though they do concede that in this Germany has as much to learn as Britain. Finally they suggest that, following the present government’s "half-baked" attempts at constitutional reform, Britain could learn from Germany’s explicitly federal arrangements. Perhaps; but their proposal to divide the Kingdom into thirty-seven ‘statelets’ could probably benefit from longer in the oven.
In any case these lessons for policy-making are not those that Record would emphasise. In his Comment he says Britain faces recession but is not well placed to counter the threat, not least because the Government’s borrowing has grown more than its self-imposed Rule would allow, partly as a result of the Treasury’s over-estimation of economic growth and so of tax revenues. The lesson he believes we should learn is that from the post-war period, that fiscal policy should be used actively, to maintain the stability of output, and not be seen only as an exercise in government housekeeping. |
| In all these debates the protagonists rely, explicitly or implicitly, on some characterisation of the working of the economy, on a model. It was ap-propriate then that the Society’s first master class, reported in Speakers’ Corner and given with clarity and enthusiasm by Professor David Hendry, was in the development of new techniques in the construction of econometric models, and in particular the use of automated methods of formulating, selecting and evaluating them. If we can learn these lessons we may be better equipped to offer lessons to policy-makers! |
| Lessons in the unfamiliar – but stimulating – are to be found in the Book Reviews in this issue, where discussions of the ‘ecology of competition’, ‘the Warhol economy’, the ‘Predictably Irrational’ and of ‘Organising without Organisations’, for example, rub shoulders with studies of the impacts of the new China, of the management of financial risk and of the distribution of earnings (which, like our salary survey, shows increasing dispersion at higher levels). It is a rich brew, but nourishing. |
| Jim Hirst Editor |
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