Select Committee on Treasury Minutes of Evidence

Treasury Committee Questionnaire completed by Ms Marian Bell


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?


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.

  I am trained as an economist and have nearly 20 years experience working as a professional economist. For much of this time I have looked at the UK economy. This has been in the context of a clearing bank's lending and deposit-taking business, HM Treasury, and the trading and customer business of a financial markets dealing room. For the last 10 years a large part of my focus has been on the conduct of monetary policy, in the UK and overseas, and on forecasting financial market variables, as an input into the strategic decisions of traders in the financial markets and their business customers. I have formed interest rate policy judgments in my role as a member of the shadow Monetary Policy Committee, the "Real-World MPC", set up by Sunday Business newspaper.

  I have experience in forecasting, including the use of econometric models and the formation and application of forecasting judgments as a supplement to purely model based forecasts. I am experienced in looking at and interpreting a wide range of economic data, ranging from official statistics to private sector data and business surveys.

  I have experience of explaining monetary policy, and my own views on it, to non-professional audiences from business, financial institutions and the general public. Over the last 10 years I have frequently spoken to groups of businessmen and women and have appeared regularly in the media explaining economic and monetary issues in lay terms.


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?

  I believe it is extremely important for monetary policy to be subject to democratic parliamentary scrutiny. In the context of an operationally independent Bank of England established by the Bank of England Act, where interest rate decisions are made by the Monetary Policy Committee, this entails that MPC members be accountable to Parliament for their decisions. Due to the lags in the operation of monetary policy, the wisdom of a particular decision can only be properly assessed after a considerable delay, and then with difficulty. It is however right that, in the interim, individual members explain the reasons behind their decisions to Parliament, through this Committee. As far as I can ascertain through watching the proceedings of this Committee and reading their reports, the current system seems to work well and provide sufficient information for this Committee to hold MPC members accountable.

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 a MPC member?

  The prime criterion for assessment would have to be how I have contributed to the achievement of the MPC's brief—the achievement of the inflation target and, subject to that, the subsidiary goals. My contribution should be discernible through the published minutes, evidence to this committee, and wider communication through interviews, speeches and regional visits. Thus the manner in which I have communicated my reasoning would also be a criterion of assessment, as would the range of information I have considered in forming my opinions, including published data; informal evidence from regional visits and meetings with a variety of economic participants from a range of sectors and regions; research and analysis.


7.  Is the framework of an explicit inflation target the best within which to conduct monetary policy?

  I believe it makes sense to articulate the monetary policy objective in terms of its ultimate goal by making explicit the rate of inflation that is being sought. A precisely defined inflation target also provides a better focus for policy and makes it easier to hold the Monetary Policy Committee accountable for its actions than would the more loosely defined `A price stability' objective on its own. Clarity about the target also enhances the credibility of the process and helps tie down the inflation expectations of economic agents.

8.  What consideration should be given to asset prices, including house prices and the exchange rate, within the framework of inflation targeting?

  To the extent that asset prices are included in the measure of inflation which is targeted, as house prices are in RPI(X) through the depreciation term, then they are clearly of direct concern. Otherwise, consideration should be given to asset prices only in so far as they affect the prospects for the targeted inflation rate. In the case of a rise in asset prices, this would usually be through a boost to consumption via the wealth effect and housing equity withdrawal; but the creation of an asset price bubble could also have implications for inflation in the event of a disorderly correction. Although consideration should be given to the role of asset prices in the monetary transmission mechanism, I would be concerned that any greater concentration on movements in particular asset prices would risk focusing on changes in relative prices and in portfolio preferences rather than on the overall price level. The MPC should not have a target for any particular price in the economy.

  Similarly, while I recognise the difficulties for particular sectors, consideration can be given to the exchange rate only in so far as it affects the prospects for the targeted inflation rate.

9.  Is it appropriate to concentrate on the projection of RPI(X) at the two-years ahead point?

  It takes time for changes in the policy controlled interest rate to affect inflation. The lags have varied over time, but the rule of thumb that it takes about two years for a move in interest rates to have its maximum cumulative impact on inflation appears reasonable. In setting policy it is appropriate therefore that the Monetary Policy Committee look ahead around two years. To attempt to control inflation over a significantly shorter time period could result in unacceptable volatility in activity and interest rates. Nevertheless the Committee is charged with keeping inflation at 2.5 per cent at all times and so should also pay attention to the path of inflation.

10.  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 believe there can be a short-run trade-off between output and inflation. This has been a frequent feature of the data, with strong output growth (and falling unemployment) associated with rising inflation, and vice-versa. In the long-run however the relationship seems to be the other way round, lower inflation being associated with higher levels of output (and lower levels of unemployment). While the level of economic activity is constrained in the long-run by the economy's ability to supply and cannot be boosted other than in the short-term by demand stimulus, there is evidence that low and stable inflation can lead to supply-side improvements and higher levels of sustainable output (see also my answer on the output gap below).

11.  What are the consequences of the current imbalances within the economy for future inflation and growth? What can monetary policy do to address these imbalances?

  There has been much concern about the divergent performance of the traded and non-traded goods sectors of the economy, which has led to very different growth rates in the manufacturing and service sectors. I am afraid that monetary policy aimed at an inflation target can do little to ease the imbalance. Policy must be concerned with the whole economy and the pressure on prices overall. The relative performance of different sectors and relative price changes can only be a matter for the Committee where overall inflation is affected.

  Another current imbalance may be thought to be the high level of household indebtedness and the low personal savings ratio. The present consequence of this is more rapid growth in consumption and overall economic output, with consequently increased inflation pressure, than would otherwise be the case. Although low interest rates have suppressed debt service costs, the effect of the high debt levels could be to make consumption more sensitive to changes in interest rates. Of particular concern would be a rapid correction of these imbalances, which could have a pronounced negative effect on growth and inflation. Although the scope for monetary policy to address the imbalances is constrained by the primacy of the inflation target, reacting to any inflation implications might have the added merit of encouraging an orderly unwinding.

12.  What is your assessment of the outlook for UK productivity growth?

  On the face of it the UK, in common with most other industrialized countries, does not appear to have enjoyed the productivity improvement consequent on the utilization of new information, communications and telecommunications (ICT) technology that has been seen in the US. Work by the IMF, however, suggests that some such improvements have indeed been experienced in the UK and elsewhere, but have been masked by other offsetting factors. That would suggest that ICT based productivity improvements are a more broadly based phenomenon that had previously appeared to be the case. One might therefore expect that, as use of the new technologies intensifies and becomes more widespread, and other factors unwind, this might show up in an overall improvement in the UK's rate of productivity growth. Historic experience however suggests it would be wise to exercise caution in assuming such an improvement in the exercise of monetary policy until it is established by the data.

13.  What weight do you place on (a) the monetary aggregates and (b) the output gap in your assessment of inflation prospects?

  I place weight on both the monetary aggregates and the output gap in my assessment of inflation prospects, but would apply neither in a mechanistic way.

      (a)  That growth in the money supply leads growth in nominal activity is an established phenomenon across countries and time-periods. However the relationship is not precise and there is considerable variation in both the strength of the relationship and the length of the lags involved. Nevertheless I believe that the monetary aggregates, and their credit counterparts, can contain useful information about the transmission of monetary policy from a movement in policy controlled interest rates through to the rate of growth of activity and inflation. Movements in the monetary aggregates can thus help in the assessment of the appropriateness of the monetary stance.

      (b)  The concept of the output gap as a measure of the amount of spare capacity or excess demand is a useful analytic tool in helping one to think about the economy and assess the degree of inflationary pressure. Its use is not without problems however. The output gap is not directly observable. It has to be estimated from the current level of output (itself subject to measurement error and frequent revision) and an assessment of the level of full capacity, or trend, output.

  Trend output is normally extrapolated by applying an estimated trend growth rate from a point in the past when the economy is thought to have been at trend. There is a risk in this approach that the economy's supply potential is treated as a given and independent of the structure of the economy, technological developments, recent economic performance and macro-economic policy. This, I believe, would be a mistake. For example, recessions erode an economy's supply potential as capital is scrapped and labour deskilled by inactivity. Conversely, steady growth can improve an economy's ability to supply by promoting investment and bringing excluded labour back into employment where skills can be rebuilt.

  A willingness to allow for this possibility on the part of the US Federal Reserve under the chairmanship of Alan Greenspan appears to have been a feature of the long period of US economic expansion that ended last year. This episode took US output considerably higher, and unemployment lower, with no pick-up in inflation, than would have been thought possible ex ante using conventional analysis based on the output gap.

14.  To what extent should fiscal policy play a demand management role alongside monetary policy in the short-run?

  Fiscal policy, like monetary policy, affects aggregate demand. However, in my view, fiscal policy is a more blunt and less flexible instrument of demand management than monetary policy. Fiscal policy is adjusted less frequently than monetary policy and so is less able to adjust to short-run changes in the economy. Moreover fiscal policy has other roles to play that constrain its ability to act in the sphere of demand management, whereas monetary policy is not subject to constraints. Overall fiscal policy is, quite sensibly, constrained by fiscal rules while changes to particular tax and benefit rates alter incentives and thus economic behaviour. These considerations suggest that monetary policy should bear the burden of demand management. However the automatic stabilisers, which give fiscal policy an automatic counter-cyclical impact and are not subject to the above constraints, should be allowed to operate.

  Of course, the impact of fiscal policy on the economy has to be taken into account in setting monetary policy.

15.  What role should econometric models play in the formulation of interest rate policy?

  Econometric models can be a useful aid in understanding and forecasting the economy. They can be a consistency check (eg ensuring the national accounts add up and the balance of payments balance), and can help identify and summarise key relationships, accounting and behavioural. However they are, at best, only an approximation of how the economy works. In particular, the estimated equations explain past economic behaviour and may be a poor guide to the future. Models should be used pragmatically. One might want to consult a variety of models, and purely model-based forecasts should be supplemented by judgment. Indeed the evidence is that forecasts from econometric models are enhanced by the application of judgment.

Curriculum Vitae

Marian Bell
1969-76Bentley Wood High School, Stanmore, Middlesex
1977-80BA (Hons)/MA

Philosophy, Politics and Economics

Hertford College

University of Oxford
1984-86MSc Economics (with distinction)

Birkbeck College

University of London

September 2000-April 2002Director, alpha economics

Set up alpha economics to undertake economic consultancy.
November 1991-July 2000Treasury and Capital Markets, The Royal Bank of Scotland

Set up and subsequently managed the economic research capability for The Royal Bank of Scotland's Treasury and Capital Markets, where I was responsible for monthly and weekly publications.

Reuters UK interest rate forecaster of the year, 1999 for UK base rate, three month Libor and 10 year gilt yields
October 1989-October 1991Economic Adviser, HM Treasury
October 1985-October 1989Senior Economist, Group Economics Office, The Royal Bank of Scotland

Managed the economics team responsible for providing country risk analysis and UK macro-economic commentary and forecasts to The Royal Bank of Scotland Group.
December 1982-September 1985Economist, Economics Office, Williams and Glyn's Bank
August 1980-November 1982The London Enterprise Agency

Worked on advising and training small businesses, inner city regeneration projects, press relations.
April 1999-Fellow of The Royal Society for the encouragement of Arts, Manufactures & Commerce
May 1993-May 2002Founder member of "The Guardian" Economics Advisory Panel
November 1998-March 2001Member of "Sunday Business" "Real World Monetary Policy Committee"

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