Examination of witnesses (Questions 280-292)
MONDAY 26 FEBRUARY 2001
MR ROGER
BOOTLE, MR
DAVID MILES,
MRS BRIDGET
ROSEWELL AND
PROFESSOR ANDREW
SCOTT
Chairman
280. We will ask the academics.
(Mr Miles) This is a speech, as I read here, to the
North East Agency Contacts, so does he not have to say that? It
is like saying "you people are very important, you are doing
a great job, we continue to think you are very important".
I think he would have to say that, would he not? Of course I am
sure he believes it!
(Professor Scott) What we know about econometric models
is that they are lousy at predicting turning points and that for
monetary policy a very sensitive time comes when the economy ceases
to grow above trend and starts to grow below trend. Those are
two occasions when econometric models will not have the accuracy
or the volatility to pick up very precisely. I think he is right
in that sense, given that is probably where we are at the moment.
He is looking at a raft of indicators to try to find out what
is happening and conversations with taxi drivers and bankers may
be very informative to get a feel for that. There are big weaknesses
in econometric models at those points in time and that is what
the Bank is worried about, are we now going below trend rather
than above trend?
(Mrs Rosewell) Even if your model is absolutely wonderful
you still do not have any data for what is going on today, or
very little data for what is going on today. If you want to forecast
you first have to decide what has happened for periods over which
you have nothing published and even for periods for which you
have some things published, all of which you know are going to
be subject to very severe revision. So most of the time that you
spend, even with an econometric model, and if you believe the
econometric model, is spent trying to sort out that ragged edge
problem and get yourself up to the point of today, and for that
most forecasters have always stuck their ears in that uncomfortable
position close to the ground.
(Professor Scott) If you are at a turning point the
ragged edge problem is pronounced because where you were last
quarter may be very discontinuous from where you are today.
(Mr Bootle) It sounds very uncomfortable keeping one's
ear close to a ragged edge on the ground. I think the record of
Alan Greenspan is regarded as worthy of some comment, and he is
widely regarded as having been a wonderful, brilliant—
281. God.
(Mr Bootle) God, yes, and central banker. If one asks,
if that has been true, what has enabled him to make those decisions,
I think very few people would say it has been a superior econometric
model. I should have thought the answer was very much that he
is supposed to have kept his ear very close to the ground. By
all accounts he looks at a mass of data. Goodness knows how many
series he is looking at as well as talking to people and listening
to people. At the end of it all he is making a judgment about
what all this amounts to. I think it would be quite interesting
in the cut he made earlier this year to know what were the official
stats on which he made that decision. It is not clear to me that
there were any that gave that result. There were a few confidence
indicators that came out a few days afterwards that gave that
result and presumably he had early access to those, or at least
had a pretty strong steer as to what they were going to show.
It was not, as far as one can tell, GDP figures or money supply
figures or consumption figures or whatever, it was what he judged
to have been a change in the mood, in the underlying circumstances,
as revealed by these bits and pieces of data.
Mr Cousins
282. If that is right we have now become inured
since the Monetary Policy Committee has been functioning and we
stare at these fan charts and we are very much into the numbers
and figures, but it becomes very, very difficult once you have
educated people into a dependence on fan charts and figures to
actually then take a decision that is based on a mood.
(Professor Scott) There is an iterative process. Everyone
knows that econometric models are fallible, they try to recount
the average past experience, so what tends to happen is that will
come up with a forecast. Everyone will listen to the mood, they
will look at the numbers and say "I do not think that is
right", but rather than say "throw it away, here are
my numbers", the model challenges the Committee members to
try to explain why they think their inflation number is different.
They say "I think investment is going to be stronger, or
consumption is going to be stronger", so there is an iterative
process between the models and the members' views, or some members'
views, which ends up with a consistent forecast which is produced
by the econometric model but where there are lots of add-ons and
impulses added here and there to arrive at a forecast which produces
in a consistent way the single number the MPC are looking for.
It does operate as a framework to try to force consistency on
the more a priori intuitive views of the MPC.
(Mrs Rosewell) It makes sure the numbers add up.
Chairman
283. Of course they have the Agents' Report
and whatever for the touchy-feely stuff.
(Professor Scott) That is right.
Mr Beard
284. The last section of the minutes of the
MPC, the immediate policy decision section, summarises the arguments
that have been put forward in the course of discussion. Do you
think the accountability of individual members would be improved
if those arguments were attributable to each individual?
(Professor Scott) I think it would be unhealthy if
you had each individual's views being noted. I think it is difficult
enough as it is for people outside the Committee to go on the
record. I think it is important, as your previous witness was
saying, to have some sense of group accountability. There is a
problem, I think, which is particularly apparent in this Inflation
Report which is with quite a close vote, 5:4, I am not sure if
in the way it was stacked up the external members particularly
had a way of recording their views. I think something like a page
or two pages where the externals could write their own views of
what was happening without actually having to attribute views
to each external member of the MPC would be helpful. It would
give a sense of freeing oneself from the Bank's editorship of
the Inflation Report without going too far down the road of having
individual accountability.
(Mrs Rosewell) I agree that forcing individuals to
say what their individual positions are could be very invidious
and would undermine independence, I agree with that. I am not
sure that you could, however, ask that external members should
make a statement separately from the Inflation Report. Apart from
anything else, they may violently disagree themselves. There is
no necessity that we are going to see the Bank on one hand and
the external members on the other, far from it, and I am not even
sure that is true at the moment. If it is particularly the case
that there are alternative views then those alternative views
should certainly be reflected more adequately than they are at
present. Just to say "there are alternative views and these
result in these numbers" is not very clear, what we want
is the story that underlies those views and to have that given
some weight if it is particularly a strong minority that are holding
it. I am not sure that you can legislate for these things because
if it will be a question of "there is a substantial minority
who think X" then that ought to be properly described, whatever
the view X and the reasoning behind it is.
285. Are there any different views?
(Mr Miles) I think you can learn an awful lot from
the voting record. I am not sure that having nine detailed personal
justifications in each set of minutes would add a whole lot because
knowing how people vote tells you a lot.
(Mr Bootle) I have not got strong views on this really.
I think the question was would it increase the accountability
of individual members. I think it most certainly would but I am
not sure that is the only consideration that one should have.
Indeed, there are points in the opposite direction. I think it
would inhibit the free flow of argument and discussion and that
ought to be an important objective as well. I think I rather take
Bridget's line that it would be nice to have the alternative story
identified in more detail so one could follow the argument through.
I am not sure that I would want names attributed to every little
jot and tittle of the way the argument went, I think that would
be unnecessary.
286. How well do you think the MPC has been
doing in the four years of its lifetime? What would be the criteria
by which you would judge whether it has been a success or not?
(Professor Scott) I think it has done exceptionally
well and you judge it by performance on inflation.
287. Just that one criterion?
(Professor Scott) In the end that is all it tries
to control, so yes.
(Mr Miles) I think I would look at more than just
what has happened to inflation. I would look at what has happened
to inflation and what has happened to the real economy, to unemployment,
output, and what has happened to expectations of inflation. Have
they built up credibility that they are going to continue to roughly
hit the target? I think looking at all those things it has been
a pretty good record. If you went back to whenever it was, May
1997, before the Bank was made independent and you had been told
"this is what is going to happen to the UK economy over the
next four years", you would—
Chairman
288. We would settle for that.
(Mr Miles) You would say "we will definitely
settle for that, thank you".
(Mr Bootle) I think I largely agree with David. I
do not think the inflation record is enough, although it is pretty
good and obviously it is, as Andrew says, the first thing they
are charged with. I am wary of judging them purely on that, or
even principally on that, because it seems to me there is an awful
lot of sluggishness in the inflation numbers and it is quite possible
that there is an environment under which inflation is going to
be more or less at the rate it has been regardless of whatever
the Bank did. In fact, I think there was a National Institute
study that argued that not long ago, that essentially if they
had done nothing to interest rates inflation would have wound
up to be the same. I think David's point is a key one about expectations
in the markets and there there has been a complete transformation
of what the markets expect about the inflation rate in Britain
compared to other countries. That is partly a comment on them
but it is also partly a comment, of course, on the authority which
sets the framework, namely the Chancellor, if it is possible for
the regime to be altered. I still think they have not had a real
test, I have to say. The big questions are the ones we were discussing
earlier on, namely what happens when they are way outside the
target, they are either well below 1.5 per cent or they are well
above 3.5 per cent, let us say, and there are difficult output
considerations at that point? The original framework is pretty
vague, I think, on precisely how they should behave in those circumstances.
That will be the real test, particularly if output is extremely
weak and unemployment is rising, that will present them with a
real test of their abilities. However, having said that, there
is one episode on which I think they did extremely well and that
was the 1998 international crisis when they reacted pretty quickly
and they managed to give the message at the critical time that
they would support demand if necessary and in the end they pulled
it off and managed to avoid a recession. I would point to that
rather than anything to do with inflation as being most important.
Mr Beard
289. Do you think that there have been any notable
mistakes in the four years?
(Mr Bootle) I think there have been a couple of occasions
when I would have judged the interest rate decision differently.
I am trying to remember the exact date. There was one when rates
went up it seemed on the back of the average earnings data which
turned out to be misleading. There was a sense in which, looking
back, that decision was too much based upon that particular indicator.
I cannot think of any serious mistakes but then, after all, the
movement has not been that big.
290. It could be mistakes of omission.
(Mrs Rosewell) Yes. I think the real difficulty is
to decide what would have happened had we not had the Monetary
Policy Committee and really to judge their performance that is
the question you have to answer and that is the question that
is most difficult to answer. I think it is perfectly reasonable
to conclude that we would have had a period of reasonably strong
growth and fairly low inflation whatever had been the outcome.
To that extent I think that it is Roger's test that is the most
important one, which is what happens in periods when things are
difficult. Therefore, there were really only two or three months
where you could say they came under pressure. That was in the
autumn of 1998 when there was the stock market crash. I think
they probably did do the right thing then and did respond to circumstances
as they changed in a way which really they have failed to do over
the last year where I think they could have cut interest rates
at various times, and particularly over the last few months, in
a way which they have failed to do.
(Professor Scott) I think we rightly perhaps over-scrutinise
the Bank here. I think we should acknowledge that it has been
a tremendous innovation. Inflation has been very low. My students
get very upset when I grade them on exams they have not actually
sat and the Bank has had this experience. They have made a couple
of mistakes. I think the one that focuses us most and that we
are talking about today is given we think there is a high likelihood
of writing a letter, we think they probably made a mistake in
not lowering rates sooner. That aside, it has been a tremendous
achievement. I think they have achieved a credibility in the markets
backed up by the falls in inflation which is rather hard to quarrel
with. There have been some minor problems, minor mistakes and
minor things about resources, about internals and externals, but
it is the best we could have hoped for.
291. You say the credibility would not have
been there had the monetary policy been a political decision still?
(Professor Scott) Absolutely. All the evidence that
justifies making the Bank independent suggests that you would
have got something like what we have seen. Undoubtedly it has
been a marvellous environment to run monetary policy under, it
is what we hoped and what has been achieved.
Mr Beard: Thank you very much.
Mr Cousins
292. Just to go back to 1998. In 1998 there
was the US Government very firmly committed to maintaining stability
in the world economy and now we have a US Government that may
be more and more concerned with issues of "moral hazard".
We had a very interesting speech by Mervyn King to a group of
oil men—he certainly picks his audience—in which he
said "Turkey? Who gives a damn about Turkey, throw Turkey
to the wolves", which in light of the statement we have going
on behind us is kind of interesting. That does suggest that there
is a genuine difference of attitude from 1998. Perhaps there is
possibly now a bit of over-confidence that was not present in
1998.
(Mrs Rosewell) Not on the part of the Federal Reserve
however. The reactions in 1998 were largely those of Greenspan
which the Monetary Policy Committee on that occasion followed.
The reactions now have been monetary policy reactions. I do not
think there was really any other more general US Government reaction
which was important in 1998.
(Professor Scott) I think the issue is how do you
provide liquidity to a country going through a financial crisis?
You either do it through the taxpayer, giving money to the IMF
and the World Bank, or you can have it through Alan Greenspan
cutting interest rates and saying "borrow as much as you
want from me". I think we have seen a shift away from the
physical one towards the monetary one, given the Asian experience,
which was the IMF bail-outs did not seem to work very well and
Greenspan's actions worked brilliantly. In many ways it is a sort
of ratification of what happened there. I am not sure it is an
over-confidence to change how you are going to do things.
Chairman: Thank you very much. Just briefly,
as this is probably your last appearance while I am still Chairman,
may I thank you very much for all you have done over the last
four years. Thank you.
|
