Treasury Committee Questionnaire completed
by Ms Kate Barker
A. PERSONAL AND
1. Do you have any business or financial
connections or other commitments which might give rise to a conflict
of interest in carrying out your duties as a member of the MPC?
I will have no such connections or commitments
when I join the MPC on June 1, 2001.
2. Are there any relevant personal or
other factors of which the Treasury Committee should be aware
in considering your nomination?
3. Do you intend to serve out the full
term for which you are appointed?
4. Please explain how your experience
to date has equipped you to fulfil your responsibilities as a
member of the MPC.
Since 1981 when I moved to the National Institute
of Economic and Social Research (NIESR), I have been fortunate
to have a wide range of experience as a practical economist, both
analysing economic developments and developing expertise on policy
issues. However, there are three particularly relevant aspects
of this experience:
In all three jobs, at NIESR, at Ford
of Europe and at the CBI, a significant part of my responsibility
involved taking forecasting judgements. To perform successfully
in these jobs it was necessary to understand forecasting models,
and also to acquire the ability to take judgements going beyond
what the model would project.
At both Ford of Europe and at the
CBI I have been in close contact with business, enabling me to
acquire a good understanding of how the business world is changing
in the UK and beyond, and of how firms respond to pressures and
opportunities. The CBI has also given me a good understanding
of the interpretation of business survey data, and of its strengths
One of my strengths is the ability
to communicate clearly to non-specialist audiences about the economy.
Ensuring that business and other audiences understand and support
the work of the MPC has rightly been recognised by the Court of
the Bank, the Treasury Committee and the MPC itself.
5. How important do you think it is
for MPC members to be subject to ex post parliamentary accountability?
Could the current procedures be improved?
The operational independence of the Bank of
England has proved a success so far. It has also won a good measure
of support. The requirement for members of the MPC to explain
their decisions to this Committee, rightly ensuring as it does
accountability to democratic institutions, is a major reason for
this widespread support, even from some who initially were cautious
about a more independent central bank.
This role will be even more vital during the
inevitable times when the MPC's decisions are less popular. I
believe that the present system works well and is sufficiently
robust. It ensures that the MPC's decisions are not only taken
after a very thorough debate, but also that this is seen to be
6. If you were to stand for reappointment
to the MPC at the end of your term, what criteria do you believe
should be used to assess your individual record as an MPC member?
The most obvious criterion is that the MPC has
continued to be successful in meeting its policy objective as
set out in the Bank of England Act 1998. (This familiar goal is
to ensure that the Government's specified objective for price
stability is met, and, subject to this primary objective, to support
the Government's economic policy objectives, including those for
growth and employment). In assessing the personal performance
of any MPC member, their own voting record and the lags in the
operation of monetary policy would need to be taken into account.
In addition, there are three further objectives
which I would set for myself:
A consistent willingness and ability
to give a clear and cogent account of my personal decisions, and
of the decisions of the whole MPC, to a variety of audiences including
the Treasury Committee.
Evidence that time and effort has
been spent in looking at the full range of regional and sectoral
information, and in ensuring that the flows of this information
into the MPC as a whole are as robust as possible.
Substantive contributions to the
analysis of the flow of data which is regularly reviewed by the
MPC, and to the debate about how interpretation of this data is
7. What resources do you think you will
need to perform adequately as a member of the MPC?
It is rather a tall order to be definitive in
advance of starting a job about exactly what resources will be
required. In answering this question I have therefore drawn on
the views of Dr Julius, who considers the present team of researchers
available to external MPC members to be sufficient at present.
It is something I would keep under review.
C. MONETARY AND
8. Is the framework of an explicit inflation
target the best within which to conduct monetary policy? Given
that an explicit target has been set, is RPI(X) the best index
to use; should it also include asset prices?
In considering the right target for monetary
policy, as in other economic rule-setting activities, it is important
to start off with the realisation that the perfect policy solution
almost certainly does not exist. The question clearly is what
is best for the UK over the next few years, given the goals which
other central banks have adopted, and given the UK's own monetary
When the Government first gave operational independence
to the Bank of England, it was widely argued that an explicit
inflation target was important to establish confidence in the
new policy framework. This referred both to confidence in the
financial markets, and to confidence among wage and price setters
in the UK. Although the new framework with the MPC now seems terribly
familiar, it is important to remember that the UK has only operated
in this way for four years, and it would seem far too soon to
change so fundamental a feature as focusing on an inflation target.
In the past, frequent changes in monetary targets were a major
factor in creating a lack of confidence in the UK's commitment
to low inflation.
In selecting the precise inflation target, which
is of course a matter for the Chancellor rather than for the MPC,
the points about consistency and confidence are also relevant.
For the MPC to retain credibility in the wider UK community, it
is important that the inflation target should be one which businesses
and individuals are familiar with, and recognise as relating to
their own experience of inflation. For this reason, RPI(X) still
seems the best measure. (However, it was sensible to move away
from headline RPI as it is so heavily influenced by interest rates
There are certainly theoretical arguments in
favour of including asset prices in the MPC's target. These include
the view that stability in financial markets (stability of sterling,
or of equity prices) is an important goal in its own right, as
it affects the stability of economic growth. However, the arguments
against including asset prices in the target seem to outweigh
The construction of such an index
would in practical terms be a difficult matterhow should
all the elements be weighted, for example? Disputes around this
question would quite likely prove damaging to policy credibility,
in addition to worries about loss of credibility from yet another
major change to the UK's policy framework.
The transparency of policy to the
wider public, and public understanding of the MPC's role, would
be hindered by this change.
The practical operation of policy
would be made even more difficult, as interest rates do not have
a predictable relationship with asset prices (of course, this
is also true of RPI(X), but to a much lesser extent).
The argument that asset prices should
be included also falls foul of the criticism that it is in effect
asking the MPC to achieve stability of economic growth as well
as monetary stabilitythe impossible task of hitting two
targets with one policy instrument.
However, I would agree strongly with the proposition
that asset price overshooting (if it is judged to exist) and the
consequences for the expected path of RPI(X) of this overshooting
either continuing, or being unwound abruptly, should be taken
into account in the MPC's debates and decisions. Where this has
had a major effect on the final decision, this would require particular
explanation in the minutes. And of course monitoring asset prices
at all times should be an important part of the MPC process.
9. Why do you think the MPC has undershot
the target so consistently? Should undershooting the target be
viewed as seriously as overshooting it?
I would not agree with the bald statement that
the MPC has undershot the target consistentlywhich seems
to imply that the MPC has failed to achieve its key objective.
RPI(X) has been below 2.5 per cent for the 23 months up to February
2001, but in only 8 of these months has it been away from the
2.5 per cent target by 0.5 points or more. The average inflation
rate in that period has been 2.1 per cent. From January 1998 (taking
the period prior to January 1998 as clearly too early in the MPC's
tenure to be included) to March 2000, however, RPI(X) was frequently
above 2.5 per cent, and averaged 2.6 per cent.
While it is tempting to describe the past 23
months as a period of undershooting, that would risk placing an
unreasonable requirement on the MPC to keep inflation at an average
of 2.5 per cent over very short time periods. For most of this
period, inflation has been stable and has not looked like moving
down to the 1.5 per cent level which would trigger a letter to
the Chancellor with the accompanying explanation. It is right
that undershooting should be regarded as seriously as overshooting,
but equally it should not be regarded more seriously. If inflation
had averaged 2.9 per cent over 2 years, but been stable, that
would equally not strike me as a clear policy failure.
However, it is clear that the MPC did not aim
in advance for an inflation rate averaging 2.1 per cent over such
a period. The exact reasons that inflation has been lower than
expected are difficult to glean from the information about the
Bank's forecast given in the Inflation Report. However, they are
likely to include a better labour market performance than expected,
with whole economy unit labour costs surprisingly subdued in 2000
in particular. In addition, sterling clearly has been stronger
than the MPC expectedfor example in the February 1999 Inflation
Report the 2 year ahead forecast for the sterling effective rate
was 97.6, whereas the actual February 2001 average was 104.1 (although
this has not, surprisingly, resulted in growth being slower than
forecast). But of course there are a whole range of other factors
which will have affected the inflation rate, upwards as well as
downwards, compared with the MPC's projections of two years ago.
10. Should the inflation target be lower?
If not now, when might be an appropriate time to change the inflation
As commented above, the inflation target is
a matter for the Chancellor, rather than for the MPC. It should
be noted, however, that it would be as wrong to conclude simply
from the fact that inflation has been around 2 per cent for some
time that the target should be cut, as it would be draw the opposite
conclusion following a period in which inflation averaged 3 per
cent. Setting these targets should be seen as a long-term game,
once the inflation rate has been reduced below the level at which
it would be regarded as excessively costly to a country's economic
I would argue that 2.5 per cent, given that
in the UK we use an arithmetic mean which tends to overstate the
impact of price rises slightly, and given the well-known concerns
about capturing quality changes adequately, is a sufficiently
demanding target to avoid the UK facing significant inflation
costs. A lower target for RPI(X) might raise concern about the
dangers of deflation.
11. How should the MPC act if some sectors
of the economy are booming (eg the service sector) while others
are in a slump (eg manufacturing)? Is there any sense in which
the MPC should be especially concerned about manufacturing?
Interest rates cannot of course be set at different
levels for different sectors of the economy. In the circumstances
as outlined above the MPC's job is to assess the inflation outlook,
taking full account of the effects in both the short and the longer-term
of the different sectoral experiences.
This means, for example, considering why the
difference between the fortunes of the manufacturing and services
The UK economy has now been broadly in this
situation for some time (although it would be more accurate to
say that it is sectors exposed to international price-sensitive
competition which have been suffering, including agriculture and
tourism as well as major parts of manufacturing).
The root cause is mainly the surprising strength
of sterling, which has also proved unexpectedly persistent. This
situation could result in longer-term upward inflation pressures.
These would arise if the result of the prolonged period of high
sterling caused a cutback in investment in the traded sectors
and an inadequate supply base to respond to the opportunity to
raise output if and when sterling depreciates. In the extreme,
this implies a policy dilemma in which interest rates might need
to be higher in the short-term to dampen inflation pressure from
the domestic sector, but an (uncertain) risk of future price pressures
in the traded sector. (It should be clear that this is not a question
of departing from the MPC's remit, but of how best to meet that
Manufacturing should not therefore regarded
with any particular preference per se, but raises particular concerns
because of the sector's exposure to international competition.
In addition, new investment tends to take longer to install than
in most parts of the service sector, so that if capacity gets
out of line with demand it takes longer to correct.
12. Do you believe that there is any
trade-off between inflation and unemployment (or output) in the
short run or in the long run?
I do not believe there is any trade-off between
inflation and unemployment in the long-run, beyond the rather
modest negative effects on growth (estimated by for example Barro)
of high inflation rates (above 10 per cent).
In the short-run, however, I do believe that
a trade-off can exist, and there are many examples. A good reason
to bear this trade-off in mind is that if inflation were undershooting
significantly (by more than 1 point and falling) then an attempt
to bring inflation back up to target quickly by dramatic interest
rate cuts could result in undesirable volatility of output. A
preferable policy course would be to aim to bring inflation back
up over a period.
13. Do you believe that the natural
rate of unemployment is a useful concept? On your assessment where
is unemployment currently relative to the natural rate? How would
an increase in productivity affect the sustainable rate of unemployment?
It is pretty difficult to imagine how to manage
monetary policy without the use of a concept such as the natural
rate of unemployment. However, personally I would prefer to refer
to the "non-accelerating inflation rate" (NAIRU) as
the expression "natural rate" sounds too much as though
the rate were permanently fixed by some law of nature.
I would also prefer to talk about the output
gap rather than imply it is only labour market conditions which
can lead to accelerating inflation. Neither of these broad concepts
make policy judgements easier, unfortunately. While looking at
past data it is reasonably clear how big the output gap was, or
how far unemployment was above or below the rate consistent with
stable inflation. However, even this is far from an exact science.
The discussion about the position of the economy at the present
time, relative to these concepts, is always highly uncertain.
The labour market is certainly as difficult
as ever to read at present. A look at unemployment and vacancy
data would suggest, based on past relationships, that unemployment
was already likely to have fallen below the NAIRU. Employer surveys
also suggest that skill shortages are increasing (looking at the
data from both the CBI and the BCC) although the indications are
that this is still much less of a problem than in the late 1980s.
Despite these trends, and despite considerable
anecdotal evidence of particular pay pressures, pay settlements
and average earnings (excluding bonuses) have so far remained
surprisingly subdued. I would judge it likely that unemployment
could not fall significantly further in the short-term without
putting upward pressure on wages, and therefore that the UK is
very close to the NAIRU at present. A more interesting question
perhaps is how much scope there is to raise employment levels
in the UK over the next five years as the efforts to lift skill
levels should start to bear fruit.
The impact of an increase in productivity on
the NAIRU is a complex one. My view would be that it is possible
for the economy to move to a lower NAIRU as a result of an adjustment
process following a rise in productivity. But this will depend
on labour supply conditionsessentially, what happens to
real wages. It is a difficult proposition to discuss in the abstract.
Higher levels of productivity certainly do not
automatically mean lower unemploymentas the examples of
France and Germany demonstrate.
14. What effects do you think the information
and communications revolution is having on the economy? How should
it affect the current conduct of monetary policy? How well do
you think such effects are being recorded in the data?
The ICT developments are obviously having very
considerable microeconomic effects throughout the economyaffecting
everything from business supply chains to personal banking transactions.
However, while this alters how many transactions are conducted,
the overall economic effects remain a matter of dispute.
Evidence in the US is generally looked to for
an indication of what impact will eventually emerge in the UK.
Some recent studies (for example Oliner and Sichel; The Resurgence
of Growth in the 1990s: Is Information Technology the story? Federal
Reserve Board Paper, 2000) seem to indicate that there is now
evidence that ICT has had an effect on productivity beyond the
ICT producing sectors. However, there are still those who would
challenge this view, and argue that the rise in productivity in
the US can be attributed entirely to labour force growth, capital
investment and the long cyclical upturn. A final judgement on
this issue will only be possible at the end of the present cycle.
My own view would be that the balance of the evidence, with productivity
strengthening especially in the sectors that make intensive use
of ICT such as financial services, now suggests that ICT has had
a significant positive effect on productivity in the US during
the present cycle.
In the UK, however, the impact on productivity
is not yet clearly apparent. Indeed, although productivity growth
in manufacturing has increased sharply since mid-1999, there is
less evidence of improvement across the whole economy. Of course,
this does not necessarily mean that ICT has not had any effect
on productivity. Other influences are also at play, most notably
that as more people are drawn into employment due to labour supply
changes, the productivity of the most recent entrants may be lower
than the average as these are likely to be lower-skilled.
The UK is also still some way behind the US
in adopting ICT, so it may be that the most significant productivity
gains are yet to come.
The most relevant question for monetary policy
is the effect of the ICT revolution on inflation. In sectors where
the adoption of ICT is strong (in the supply chain, or in dealing
with the customer) then the market for products is becoming more
competitive, lowering prices and squeezing profit margins at least
in the short term.
This in the short run may tend to raise real
wages, which in the absence of any supply response could actually
push up inflation. However, in the UK so far as this effect has
been felt, the response of supply seems to have kept pace. In
the longer-run firms will need to cut costs, including wage costs,
to restore adequate profit margins.
Turning to the measurement of the effects of
the ICT revolutionin terms of the micro impacts on the
supply chainthese are clearly difficult, if not impossible,
to measure directly. In terms of the measurement of retail prices,
it is clearly important to ensure that transactions conducted
over the internet are reflected in price indices as these become
more significant. But of course part of the impact will in any
case be reflected as internet transactions compete with conventional
15. To what extent should fiscal policy
play a demand management role alongside monetary policy? If you
think greater fiscal action is desirable, what instruments would
It is generally argued that monetary policy,
which is easier to change and has fewer undesirable effects in
terms of economic distortions, should be used as the sole instrument
of demand management. The year to year setting of fiscal policy
is then focused on achieving long-term fiscal goalssuch
as the Chancellor's fiscal rules, or the constraints of the eurozone's
Stability and Growth Pact.
This approach to policy has much to recommend
it. Indeed, one reason for believing that the UK is well-placed
to weather the current global slowdown is that the success of
both fiscal and monetary policy management over the past few years
has left the UK with room to manoeuvre. However, this approach
does not provide a sufficient guide to policy in all circumstances.
At present, for example, fiscal policy is over-achieving on the
Chancellor's rules, and how fast the surplus should be reduced
requires a view to be taken on how different fiscal adjustments
would affect economic growth and inflation.
I would also agree with the proposition that
at a time when the economy is unbalanced by a strong exchange
rate (see Question 11) the sectoral balance may be better served
by a tighter fiscal policy with more scope for lower interest
rates. But this is by no means a certain solution to these policy
difficulties. Indeed, it is probably as important to look at the
micro aspects of fiscal policy, for example, which sector, in
the short term, will feel the impact of any added burden or benefit
from tax changes. However, these questions are properly for the
Chancellor to decide, rather than the MPC.
16. What role should econometric (and
other) models play in the formulation of interest rate policy?
Econometric models are best thought of as useful
tools to aid the understanding of the interrelationships in the
economy. The nature of the economy is too complex for one model
to capture it allwhich is why a number of models are used
by the Bank to answer the range of issues which the MPC is likely
to be concerned with. Use of models is however not going to yield
easy answers about interest rate decisions. Uncertainty about
if and how past relationships between economic variables are changing,
about the reliability of recent data, and the future course of
factors not determined in the model, are all issues which require
the exercise of forecasting judgement.
17. What factors have caused Sterling
to be so strong over the past three years? Could a temporarily
over-valued currency have permanent effects on economic growth,
and inflation, in an open economy?
If a currency moves to a level which many economists
and commentators are prepared to describe as "over"
or "under" valued, this tends to imply that economists
are going to find it difficult to explain. I do believe that sterling
has been overvalued over the past three years, mainly by comparison
with the euro. By "overvalued" I mean at a level where
many firms find it difficult to compete either in export markets
or against importers into the UK. The decline in profitability
in manufacturing firms, and the fall in investment in 1999, are
both evidence of this competitive difficulty. Nevertheless, it
is also true that manufacturing has performed better than many
commentators (myself included) would have expected, had we known
just how strong sterling was going to be. In that sense the currency
has perhaps been less overvalued than earlier estimates suggested.
To the extent that this situation is explicable
in terms of economic fundamentals, the two key factors are:
Stronger growth in the UK, leading
to the economy being closer to, and possibly at times above, its
long-term growth potential, therefore requiring higher real interest
rates to keep inflation on target. In the eurozone, however, the
economies on average have remained below trend and real interest
rates have been lower.
A perception that the UK economy
has better growth prospects, due to greater flexibility, especially
in the labour marker, and to earlier adoption of the "new
A temporarily overvalued currency can have long-lasting
(though not permanent) effects on growth (ie a change in the level,
rather than the long-run rate). These would probably be expected
only if the overvaluation is significant (over about 10 per cent)
and "temporary" implies at least 18 months to two years.
The main channel through which this occurs is the run-down of
capacity in the exporting sectors. The UK has recently been experiencing
this particularly in sectors such as metal manufacturing, where
the product is sold very much on price. When the overvaluation
is corrected there is a shortage of supply, leading either to
higher inflation needing to be checked by higher interest rates,
or directly to a lower level of output, than would otherwise have
occurred. (This point should not be taken as implying that this
effect is necessarily very large.)
18. How important a role should the
exchange rate play in influencing the MPC's decisions?
In the short-term, the effect of exchange rate
volatility on prices and the lag before the effect is felt clearly
needs to be taken into account in setting interest rates, just
as any other short-term influence on the inflation rate is. The
MPC therefore has to take account of the present level of the
exchange rate, and consider the possible impact of their decisions
on the rate. However, it is of course impossible for the MPC to
have an exchange rate target as well as an inflation target. The
answers to Questions 11, 15 and 17 discuss worries about the effects
of exchange rate volatility on economic prospects in the longer-term
which would also need to be borne in mind, although the policy
implications of these concerns are highly uncertain.
Katharine Mary Barker
Born: 29 November 1957
1974-76 Stoke-on-Trent Sixth Form College
1976-79 St Hilda's College, Oxford (BA First
Class Honours, Philosophy, Politics and Economics)
Career (with relevant job content briefly indicated):
1979-81 Investment Analyst, Post Office Pension
Fund (now HERMES)
Analyst of, and dealer in, UK equitiesprimarily
in consumer non-durable sectors.
1981-85 Research Officer, National Institute
of Economic and Social Research
Forecasts for European economies and world trade
as model inputs.
Major project leading to co-authored articles
in National Institute Review on comparative European macro-economic
1985-94 Chief Economist, Ford of Europe
Analysis and forecasting automotive markets
across Europe, and related corporate strategy.
Forecasts of exchange rates and interest ratesadvice
on company's hedging strategy.
Management information and presentations on
1994-2001 Chief Economic Adviser, Confederation
of British Industry
Developing CBI policy, in discussion with member
firms, on major economic topics (chiefly UK monetary and fiscal
policy; European Economic and Monetary Union). Heading up work
on major issues (for example, the UK's productivity performance).
Articulating and representing CBI policy in
public (including press and broadcast media) and private lobbying
activities, in Whitehall and in Brussels.
Regular communication on policy and economic
trends with member companies.
Responsibility for all CBI business surveys,
economic forecasts, and detailed work on business taxation issues.
Member of Royal Economic Society Council 1994-99
Member of Chancellor Clarke's Panel of Independent
Economic Advisers 1996-97
Member of Institute for Public Policy Research
(IPPR) Commission on Public Private Partnerships 1999-2001
Member of Board of GovernorsAnglia Polytechnic
University (since 1999)
Non-executive Director, Yorkshire Building Society