Treasury Committee Questionnaire completed
by Mr Paul Tucker
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?
2. Are there any relevant personal or other
factors of which the Treasury Committee should be aware in considering
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
(1) Much of my career has been spent working in financial
markets. This has given me experience of the way in which monetary
policy decisions are transmitted into market interest rates and
other asset prices and via the banking systemimportant
parts of the monetary transmission mechanism. It has also given
me experience of the ways in which financial markets form expectations
of monetary policy decisions. That is relevant to using financial
market prices as indicators or diagnostics of expectations, which
affect economic behaviour.
(2) I have been involved in various ways
over the past 10 years or so in advising on the formulation and
presentation of monetary policy. I ran one of the Bank's monetary
analysis divisions, which focused principally on questions of
monetary policy strategy/framework and on the monetary and credit
aggregates. Over the past five years, I have been one of the small
team preparing the minutes of MPC meetings, and in earlier roles
I contributed to speeches on monetary policygiving me some
experience of explaining policy.
(3) In my current role, I have experience
of synthesising macroeconomic, financial market and banking system
information with market intelligence, as represented for example
in the Bank's twice yearly Financial Stability Review. The information
relevant to monetary policy overlaps considerably, and the objectives
are closely related.
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?
(1) Very important. MPC members are not democratically
elected but take decisions which affect the people of the country
individually and collectively. It is right that we should be accountable
to the people through the people's elected representatives. For
that accountability to work, the framework and objectives should
be clear, which I believe they are.
(2) So far the current procedures seem to
have worked well. The public debate on monetary policy has improved
considerably compared with a decade ago.
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?
(1) First and foremost, the outturns of inflation
relative to the target set by the Government; and the explanations
the Committee has given of its analysis and decisions. The lags
in the effects of monetary policy changes need to be taken into
account: there can be shocks to the economy before the full effect
of earlier policy settings has worked through. So ex post assessment
needs to be based on the information available to Committee members
when making their policy choices.
(2) Secondly, my voting record, coupled
with my record of explaining my analysis and policy choices. If/where
I vote in a minority, the counterfactual path of rates I preferred
would need to be taken into account, which of course is not straightforward.
(3) Third, my record in publicly explaining
the Committee's work, and in listening to input from around the
(4) Fourth, my record as the Executive Director
for the Markets area of the Bank, accountable to the Bank's Court
of Directors; and so in particular the Bank's performance in (i)
the implementation of monetary policy (through open market operations
etc) and (ii) providing analytical and practical input on financial
markets to the Committee's deliberations.
C. MONETARY POLICY
7. Is the framework of an explicit inflation
target the best within which to conduct monetary policy?
It is by far the best framework the UK has had
in recent decades. It has three distinct merits:
(1) It focuses monetary policy on the
objective it can achieve: low and stable inflation, which is a
pre-condition for a stable macroeconomic environment more generally.
That is the contribution which monetary policy can make to the
(2) By focusing on the objective of
monetary policy (low and stable inflation), it means that the
monetary authority must (i) take into account the whole range
of possible influences on inflation; (ii) be forward looking,
given the lags with which monetary policy changes affect the economy.
In particular, this means that the monetary regime does not rely
on the stability of one particular economic relationship (as,
eg, with monetary targeting).
(3) It is more straightforward to explainto
the public, business, and financial markets. This is important
not only for effective accountability, but also to facilitating
understanding of the Committee's "reaction function"
and so to influencing private sector behaviour in a way consistent
with achieving and maintaining low and stable inflation.
8. What consideration should be given to asset
prices, including house prices and the exchange rate, within the
framework of inflation targeting?
Asset prices are important in two (separable)
(1) The value of many assets affects
the path of aggregate demand. For example, consumption is affected
by wealth directly, and indirectly via the effect of collateral
values (house prices) on credit availability; investment by the
cost of capital, and by the value of "collateral" companies
hold; net trade by the real exchange rate, etc. So asset prices
are an important input to assessing the outlook for activity and
(2) Asset prices are forward-looking,
and so are an important indicator of expectations of, for example,
corporate earnings growth (eg equities), real interest rates (eg
equities and bonds), credit risk (eg corporate bonds), inflation
(nominal bonds). Given lags in the monetary transmission mechanism,
policy has to be forward looking, making the availability of forward-looking
asset prices potentially very helpful. The Bank has published
a lot of work over the past decade or so on the extraction of
information from asset prices.
Although separable, these two perspectives on
asset prices are related. The effect on the outlook for activity/inflation
of a change in asset prices will depend on what was the underlying
cause of the change. One diagnostic of the shock can be any changes
in relative asset prices; for example, a shock to the inflation
regime and so to inflation expectations would, in principle, increase
the yields on nominal bonds but not yields on RPI-indexed bonds.
In practice, such diagnosis is fraught with uncertainty, in particular
because asset prices can be temporarily or even persistently affected
by institutional influences on demand and/or supply and because
of the difficulty of identifying changes in risk premia more generally.
Should the Committee in any way target asset
pricesin general or in particular? No. First, that would
clearly be contrary to the Government's remit. Second, the Committee
has one instrument, so there would be confusion if it were trying
to hit more than one target. Thirdeven if the remit were
changed, or the Committee were somehow given another instrument
(neither of which I advocate or believe feasible)the Committee
could not know what level of asset prices to target. Fourth, even
if it did know what level to target, I doubt it could influence
asset prices sufficiently to bring them to the desired level.
9. Is it appropriate to concentrate on the
projection of RPI(X) at the two-years ahead point?
The significance of the two year forecast horizon
is that, on average in the past, it is roughly where a change
in the official interest rate has had its maximum effect on inflation,
while of course there is some effect on inflation sooner than
that. There are, though, a series of riders to this:
(1) The point about "two years"
is empirical. The Bank needs to keep under review whether the
average alters at all over time, with an understanding (and so
explanation) of why.
(2) Whether inflation is increasing
or decreasing at the two-year horizon obviously also matters.
(3) The appropriate horizon may vary
according to the nature of the shock to the economy. Related to
that, in the event of shocks taking inflation away from the target,
the Committee needs, in line with the remit, to take account of
the possible effect on the volatility of output in deciding how
quickly to bring inflation back to target.
(4) It is not just the central (modal)
projection which matters, but the distribution of risks and the
weight different kinds of risk can sensibly be given in policy
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?
(1) There is a generally recognised
trade-off in the short-run.
(2) In the long-run, I believe
there is no such trade off. A monetary expansion finds it way
into the price level, with output and employment determined by
real economy/supply side factors. It is plausible, in fact, that
the opposite of the short-run trade off holds, with low and stable
inflation enhancing the long-run performance of the real economy.
First, in an environment of high and unstable inflation, longer-maturity
nominal debt contracts would plausibly carry not only a premium
to compensate holders for expected inflation but also a risk premium
given the uncertainty about future inflation outturns. To the
extent that investment is financed by longer-maturity nominal
debt, such a risk premium would add to the real cost of capital.
In a stable monetary environment, that risk premium might therefore
be saved, helping to support investment. Secondly, in a stable
monetary environment, households, firms and entrepreneurs should
find it easier to disentangle changes in the general price level
from changes in relative prices, potentially aiding an efficient
allocation of resources - including to investment projects.
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?
Imbalances have for a while characterised the
economy in three ways which, although closely related, it is helpful
(i) in terms of the components of aggregate
demand: weak external demand relative to strong final domestic
demand, especially consumption;
(ii) in balance sheet terms:
an associated accumulation of debt by the household sector, and
of external debt in the national balance sheet reflecting a persistent
current account deficit;
(iii) in terms of the breakdown of output:
strong services sector output and profitability relative to weaker
output and profitability in the sectors of the economynotably
manufacturingwith a large export or import-competing component.
These imbalances have been rooted in a series
of shocks to external demand combined with the strength of sterling
against the euro (and for a while in the mid-late 90s, against
the dollar too). Monetary policy has responded to the weak (in
fact, persistently negative) contribution of net trade to output
growth by stimulating consumption growth in order to keep the
path of aggregate demand in line with the economy's supply potential.
Looking ahead, this poses risks through a number
of potential sources. For example, the accumulating debt will,
other things being equal, leave the household sector more vulnerable
than otherwise to "bad luck" with the possibility of
abrupt adjustment; or the euro may rise against sterling. It is
very difficult to judge whether the unwinding of the imbalances
would put upward or downward pressure on inflation. That would
depend on the circumstances in the economy at the time. But the
greater the imbalances become, the greater the risk of abrupt
adjustment, and so the greater the possibility of undesirable
volatility in inflation (and activity) in future.
What can monetary policy do about this? Little
if anything to affect the external environment, and so little
to reduce the imbalances directly. It can, perhaps, by consistently
achieving the inflation target and so accumulating credibility,
help to anchor inflation expectations in the medium term, which
may help to stabilise inflation if/when the imbalances unwind.
12. What is your assessment of the outlook
for UK productivity growth?
The most likely outlook is probably that productivity
growth remains in line with its long-term average of around 2
per cent. A central estimate is needed but there is inevitably
considerable uncertainty about it. This issue is perhaps especially
difficult to judge at present. On the one hand, if the US economy
has enjoyed a material improvement in underlying trend productivity
growth over the past half decade or so, stemming from technological
change and the organisational efficiencies it permits, that could
reasonably be expected to spread to other economies over time.
In principle, flexibility in the UK economy should help it over
time to share in those gains. On the other hand, the extent and
persistence of the US improvement is still difficult to judge;
and it is not so far obviously apparent in the UK data. It is
an issue where I hope to learn from talking to business managers
around the country.
13. What weight do you place on (a) the monetary
aggregates and (b) the output gap in your assessment of inflation
(a) The monetary aggregates
Inflation is a nominal (or monetary)
phenomenon. The price of goods and services is expressed in terms
of money; and inflation is a rise (or fall) in the general
level of prices. Thus whileas part of keeping inflation
pressures in balance (see (b) below)the MPC has to aim
to keep real aggregate demand in line with aggregate supply,
that is strictly consistent with any rate of inflation. It is
therefore vital to track nominal indicators. The monetary
aggregates are, by definition, nominal and therefore warrant monitoring.
Interpreting both narrow and broad money has, however, for a long
time been complicated by changes in the pattern of demand for
money (so-called velocity changes) reflecting, for example, changes
in the characteristics of the saving and instant-access deposit
facilities provided by banks. Nevertheless, in order to help avoid
big mistakes, the monetary aggregates can potentially provide
a useful source of questions: the relationship between persistent
rapid monetary growth and rising inflation is well established
Even if the relationship between the monetary
aggregates and GDP/inflation was so unstable as to make them useless
as an indicator, that does nothing to alter the importance of
monitoring nominal variables. In the UK set up, various
measures of inflation expectationsfrom surveys, derived
from bond markets, etc - are very important in this respect. Keeping
medium-long inflation expectations in line with the target is
necessary to achieve inflation in line with the target over time.
Separately, the sectoral money and credit data
can provide useful insights on developments in the household and
From a position of balance, a reduction in interest
rates (monetary expansion) will tend to lead to a positive output
gap and thus to inflationary pressure, and vice versa for an increase
in interest rates.
The output gap is a real economy concept. In
terms of thinking about monetary policy choices, it is important
in focusing on levels rather than growth rates. Keeping inflation
stable requires the level of output to be in line with
the economy's potential supply capacity rather than just the growth
rate of output to be in line with trend growth. Thus, for example,
in the face of a negative shock to demand taking the level of
GDP below potential, output may need grow at above its
trend growth rate for a while in order to bring inflation back
In practice, things are somewhat less straightforward,
as the supply capacity of the economy is not directly observable,
and estimating it is hard, subject to uncertainty and error. A
range of tools should be helpful: econometric estimates, indicators
of cost and price pressures, survey and other indicators of spare
capacity, anecdotal information, etc.
14. To what extent should fiscal policy play
a demand management role alongside monetary policy in the short-run?
(1) The most important contribution that fiscal policy
can make to monetary stability is to maintain a prudent level
of government debt, so that there is no question of the
country needing to inflate away its debts to remain solvent. The
UK is most certainly in that position at present, and has been
for some years.
(2) Fiscal choicesthe size of government
spending, and the extent of deficit or tax financingare
matters for the Government. The job of the MPC is to understand
any fiscal policy changes so that they can be taken into account
in its projections of output and inflation.
15. What role should econometric models play
in the formulation of interest rate policy?
Not only econometric models, but economic models
more generally are essential to policy formationalongside
more anecdotally-based assessments of prospects. Since policy
has to be forward-looking, a forecast is an essential ingredient
of the policy process. Econometric models bring the benefit of
ensuring that analysis is framed in a consistent way, so that
wider effects of assumptions/judgments about one part of the economy
are traced through. But econometric models are based on estimates
of relationships prevailing on average in the past. This
calls for alertness to whether key relationships change; and for
a focus on identifying the particular pattern of shocks affecting
the economy at any time, since the coefficients in the model will
reflect the average of all past shocks. More structural models,
attempting to get at underlying behaviour, can sometimes contribute
to that and so to the judgments which have to inform the
forecasting and policy process.
16 May 2002
|P M W Tucker (Paul)
|Date of Birth:||24.3.58
|Education:||Trinity College, Cambridge (Maths Parts I and II, and Philosophy Part II)
|September 19801982||Joined the Bank of England. Banking Supervision Division, supervising small banks.
|1983-84||Banking Supervision Division; Policy and Legal Section.
|1985-86||Secondment to Baring Brothers & Co., Ltd; Corporate Finance Department.
|January-October 1987||Banking Supervision Division; Policy (Basle International Capital Convergence Agreement).
|November 1987-June 1988||Secondment to Hong Kong Government as Adviser to the Securities Review Committee on the reform of the Hong Kong securities markets and regulatory system, under the Chairmanship of Ian Hay Division.
|July 1988-April 1989||Money Markets Operations Division; review of payment system risk and development of proposals for Real Time Gross Settlement wholesale payments system.
|April 1989-October 1992||Principal Private Secretary to Governor Leigh-Pemberton (now Lord Kingsdown).
|November 1992-June 1994||Gilt-Edged and Money Markets Division.
|July 1994-December 1996||Head of Gilt-Edged and Money Markets Division. Led teams which analysed and implemented reforms of the Bank's money market operations and the structure of the money and gilt markets.
|January 1997-December 1998||Head of Monetary Assessment & Strategy Division, including from May 1997 secretariat to Monetary Policy Committee.
|From January 1999||Deputy Director, Financial Stability, including membership of the Bank's Management Committee. Also secretariat to Monetary Policy Committee.