Questionnaire in advance of Treasury Committee
hearing for Professor Tim Besley
A. PERSONAL AND
PROFESSIONAL BACKGROUND
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?
Are there any relevant personal or other factors of which the
Treasury Committee should be aware in considering your appointment?
None
2. Do you intend to serve out the full term
for which you are appointed?
Yes
3. Please explain how your experience to
date has equipped you to fulfil your responsibilities as a member
of the MPC? In particular, what areas of the MPC's work do you
believe you will make a particular contribution to, and which
will you have to undertake additional research on on your arrival?
I have been a professional economist for nearly
20 years. Throughout that period my main interest has been in
applied policy analysis. This has involved developing appropriate
economic theory and empirical analysis of specific policy issues.
My work has ranged across a variety of policy spheres and types
of economy—developing and developed. For example, I have
studied economies as diverse as those of India and the United
States. Latterly, the main theme of my research has been to understand
how institutions shape economic performance taking both economic
and political factors into account.
My research involves making sense of economic
data as well as refining the analytical tools that are used by
economists for studying such data. Most of my work could be classified
as applied micro-economics. However, I have looked at determinants
of macro-economic performance and its link to policy. I have a
long-standing interest in the factors that shape patterns of regional
development.
Modern macro-economics uses approaches that
emphasise the need for rigorous micro-economic foundations. This
means paying careful attention to such issues as wage and price
setting, the behaviour of consumers and firms, and the workings
of financial markets. These are all areas where I have made academic
contributions.
4. To what extent will membership of the
MPC require a different approach from that required in academic
research, with regard to the discharge of the duties and responsibilities
involved?
My academic research is about identifying and
analysing specific issues. This problem-driven focus equates well
with what is needed on the MPC. However, in academic research,
it is sometimes possible to shelve important issues for later
thinking and even to pick the "low hanging" fruit in
a research program. The time frame for research is also often
months, if not years. In my MPC work, I am excited by the challenge
of responding more to current exigencies and facing the challenges
set by responding to immediate events. Being a member of the MPC
also provides an opportunity to communicate economic ideas to
a wider audience.
5. Which of your publications or papers are
of most relevance to your future work on the MPC?
Of particular relevance is my work on pricing
in imperfectly competitive economies. This was mainly applied
to trying to understand how tax changes affect prices. However,
it is of much wider applicability and is a useful starting point
for thinking about how prices respond to any kind of cost shock.
In work on the United States, we found evidence of effects that
underlined the need to take models of imperfect competition seriously
in explaining links between costs and prices. This is now an important
theme in most macro-economic models. It is also highly relevant
in thinking through the impact of cost shocks—such as increases
in oil prices.
B. ACCOUNTABILITY
6. How important do you think it is for MPC
members to be subject to ex post parliamentary accountability?
What are the strongest and weakest parts of the current procedures
in the UK?
Ex post accountability is an essential
part of a successful monetary policy regime. I regard the fact
that the MPC is accountable to Parliament rather than only to
the Executive as a key strength of the system. This increases
the chances that monetary policy is assessed and debated on a
non-partisan basis. I strongly support the requirement of MPC
members to appear before the Treasury Select Committee as part
of the appointment procedure and for discussion of interest rate
policy decisions. I have yet to observe any weaknesses in the
system.
7. If you were to make yourself available
for reappointment to the MPC at the end of your term, what criteria
should be used to assess your individual record as an MPC member?
I would hope that my voting record and inflation
outcomes during my tenure would show that I have played a role
in keeping inflation close to target. In addition, I would wish
to be judged on how effectively I have communicated my views and
explained the rationale behind MPC decisions.
8. Do you believe there is merit in having
an individual paragraph in the minutes of MPC decisions in which
to explain your most recent vote?
The views of dissenters are already carefully
reflected in the minutes. There are also many opportunities for
explanations of decisions through speeches, interviews and appearances
before the Treasury Select Committee. It is too early for me to
judge whether this constitutes adequate opportunity for MPC members
to express their views.
C. OTHER PROFESSIONAL
ACTIVITIES
9. What other professional activities do
you expect to undertake in addition to your position on the MPC
and how do you intend reconciling these activities with your position
as a MPC member?
I will hold an ESRC professorial fellowship
for the other two days per week. This fellowship runs for three
years alongside my term on the MPC. I was awarded this fellowship
to undertake a body of research in political economy which is
broadly focused on understanding the institutional foundations
of market economies. I will remain Professor of Economics and
Political Science at the LSE under the terms of this fellowship.
There is no conflict between fulfilling this research programme
and my duties as an MPC member. Indeed, I imagine that my experience
on MPC will provide insights into the issues dealt with in that
research programme.
I also have a modest commitment of time as a
lead editor of the Mirrlees Review recently launched by the Institute
for Fiscal Studies to look at the future of the UK tax system.
In the near term, I am chairing the DFID-ESRC joint funding program
committee and will see that commitment through in the next year.
I also have a short-term commitment to the review that Sir Hayden
Phillips is conducting into the funding of political parties to
which I am giving some advice. During my tenure on the MPC, I
may occasionally take on small projects for the World Bank, IMF
or other bodies, but only where these bear directly on issues
which are relevant to my research expertise and the time commitment
is modest.
Along side these commitments, I shall be involved
in a limited number of "everyday" academic duties—such
as writing reviews, supervising PhD students, being a member of
professional bodies and networks, and attending conferences in
the UK and abroad.
10. Outside of MPC meetings, what activities
do you intend undertaking in order to add to the public's understanding
of the role and decisions of the MPC?
I will undertake a number of agency visits—I
have two arranged already. These will be accompanied by briefings
and question-and-answer sessions. I also plan to make speeches
and give interviews to explain my thinking on relevant issues
as well as that of the MPC.
D. MONETARY AND
ECONOMIC POLICY
11. How might the system of control over
monetary policy in the UK, in place since 1998, be improved? Is
the framework of an explicit symmetrical inflation target the
best within which to conduct policy?
I have a lot of faith in the current system.
We have a regime with many attractive features—a clearly
defined policy objective, independent MPC members and careful
communication of the rationale for decisions through publication
of the minutes and the inflation report. Although it has not yet
been used, the open letter that would accompany any movement of
inflation more than one percent away from the target would also
be important in explaining the MPC's thinking in such circumstances.
Also important is the dedicated work of the Bank of England staff
which provides skilled and careful analysis of relevant data.
The explicit symmetrical inflation target has
clearly served to anchor inflation expectations limiting second
round responses in wages and prices to shocks, such as the rise
in oil prices.
The system is both transparent and accountable.
The stability that has been enjoyed in the UK economy since 1998
is, in large measure, due the features that I have outlined. At
this early stage in my position as an MPC member, I see no direction
for improvement.
12. How great is the risk to UK growth and
inflation posed by high nominal oil prices? How should monetary
policy react to higher inflation caused by increased oil prices?
As I write, this risk appears to have subsided
somewhat. But the recent rise in oil prices has clearly presented
enormous challenges for the MPC and for central banks the world
over. As I noted above, the commitment to keep inflation close
to target has helped to limit second round effects in wages and
prices. This explains, in part why the inflationary effect has
been more muted than might have been predicted ex ante.
But it is still important to keep a careful eye on possible second
round effects. When oil prices were rising steeply, there is also
some evidence that domestically generated inflation was weaker
as firms decided to bear down on other costs. If correct, this
has been good news for meeting the inflation target. However,
it may also suggest that we will enjoy less relaxation in inflationary
pressures than might have been hoped for as oil prices fall back.
13. What consideration should be given to
the exchange rate and to asset prices, including house prices,
within the framework for inflation targeting? In particular, how
should monetary policy react to asset price bubbles?
It is best not to think of either the exchange
rate or asset prices as affecting monetary policy. The
key issue is to analyze the forces that lie behind exchange rate
and asset price movements in order to establish the underlying
drivers. Monetary policy should then respond appropriately to
these drivers in so far as they have implications for inflation.
But there is no simple formulaic rule—each situation needs
to be analyzed on its own merits.
There is much popular discussion of bubbles
in asset markets. On the whole, it is difficult to identify the
difference between bubbles as distinct from "normal"
fluctuations. I am sceptical about the ability of the MPC to use
monetary policy as a means of better aligning asset prices with
fundamentals.
14. To what degree do you consider the recent
rise in personal insolvencies to be of significance when considering
the vulnerability of UK household balance sheets? What impact
will this have, in your opinion, on setting interest rates?
Insolvency is clearly very difficult for those
concerned and nobody welcomes an increase in the rate of personal
insolvency. To some degree, this may reflect a poor appreciation
of the consequences of indebtedness among some groups of borrowers.
However, given the sophistication of most lenders, it is difficult
to believe that lenders are unaware of these risks when deciding
how much to lend. Any move towards policy interventions would
need to acknowledge the important role that access to credit plays
particularly in allowing individuals to open small businesses
and in becoming home owners. Either way, policy making in this
area is well beyond the scope of the MPC's remit.
As far as monetary policy is concerned, the
rate of personal insolvency could affect the transmission mechanism
of interest rate changes in so far as it affects aggregate consumption.
To that extent, the prospects for personal insolvency rates of
interest rates should be taken into account in analyzing interest
rate policy decisions. However, it is only one aspect among many
that is likely to matter.
15. How would you describe the state of the
UK labour market at present? In particular, how has net migration
impacted on growth and inflation in the UK?
The labour market is generating a great deal
of discussion at the current juncture. How one reads the recent
upturn in unemployment is a key issue for monetary policy as it
has implications for wage pressures going forward. There is evidence
that increases in participation (particularly by older workers)
is an important factor in driving this. Moreover, employment growth
still seems quite strong. Hence, I am inclined against interpreting
recent increase in unemployment as a standard cyclical weakness
in the economy. Doing so would tend to contradict the evidence
coming through in consumption, investment and output data.
It is likely that wage pressures have been eased
by an increased supply of migrant labour in recent years and this
may continue to be the case in future. But this will depend in
part on whether the migration that we are seeing is temporary
or permanent and whether the UK remains an attractive destination
for migrants.
Little is yet understood about the consumption
patterns of migrants to the UK. For example, we need to understand
better whether migrants save more than non-migrants in anticipation
of returning to their country of origin or the extent to which
they chose to remit their income to relatives abroad. More generally,
it is important to look at ways in which migrants are creating
pressures on the consumption side of the economy, such as in housing
markets.
16. To what extent should fiscal policy play
a demand management role alongside monetary policy in the short
run?
Fiscal policy should be determined by the need
for investment in public goods and services such as transport
infrastructure, education, health, social protection etc. Ideally,
such investments should reflect the social costs and benefits
that public spending brings to the economy taking a long-run view.
There are good reasons to smooth the costs of providing public
services by issuing public debt to finance long-run investments,
to smooth temporary fluctuations in tax revenues and to smooth
payment of sudden unanticipated spending needs (such as the foot
and mouth outbreak). However, I favour pursuing a debt policy
that is broadly neutral over the economic cycle. This view of
fiscal policy gives no role to demand management per se.
September 2006
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