A report in the FT today reveals that Labour commissioned two consulting firms – GFC and Clearpoint – and the report is said to conclude that the BoE’s London location “leads to the regions being underweighted in policy decisions.” The recommendation is to move the Bank of England to Birmingham.
This is disheartening. Two reasons. First, there are actual things that could be fixed in the Bank of England. Like the relationship between monetary and fiscal policy at the zero bound; transparency in the models and forecasts; the lack of an action plan for unconventional policies in the event of another crisis; the vagueness of the financial stability mandate; the preponderance of internal members on the Monetary Policy Committee; the refusal of the MPC to present clear forecasts of what they intend to do; the lack of clarity about how they trade-off real and nominal variables… and much more. Instead the headline is about a report on something that does not need fixing.
A few points.
How would monetary or financial policy settings ideally have been different? Tighter or looser? Why?
The Bank of England’s mandates do not mention the regions explicitly as part of monetary or financial stability targets.
The BoE’s monetary policy remit does mention the regions:
“The Committee’s performance and procedures will be reviewed by the Bank of England’s Court on an ongoing basis (with particular regard to ensuring the Bank is collecting proper regional and sectoral information).”
But this is interpreted by the BoE, and a reasonable reader, as meaning that in figuring out the appropriate policy in pursuit of its aggregate policy objectives, it should collect the right information. Part of the clue is in the mentioning of sectoral, as well as regional. That is not to give the BoE two extra goals – adjudicating on the regional and sectoral distribution of activity and inflation – but to instruct it about dimensions of the distribution of activity that might be important for its aggregate goals.
I think the text is arguable, and bendable in the direction of regionalists and sectoralists. But this is certainly how the MPC interpret it, for example, as evidenced many times, including a recent Treasury Committee hearing,
and how it should be interpreted.
In pursuit of stability in aggregate inflation and activity [and financial stability], distributions are not irrelevant; the prevalence of a small group of highly indebted individuals, and others who were highly exposed was one of the drivers of the financial crisis. Had the debt or the exposures been shared out more equally, there would not have been the defaults and fire-sales. Mismatch between where jobs and workers are – in actual and occupational space – reduces effective labour supply. Because rich people have lower marginal propensities to consume than do the poor, inequality affects aggregate consumption. But these effects are important for the BoE only because they affect the aggregates that they seek to control. And they often come with important aggregate signals – like the spread on risky assets, aggregate consumption, or aggregate unemployment and vacancies. And financial effects aside, they are often not particularly time-varying or large effects.
But where is the evidence that the BoE gives insufficient weight to these considerations? How did monetary or financial policy suffer?
Even if the BoE were to given regional goals, they would not be able to achieve them.
The BoE’s main tools are aggregate tools, not capable of policing a regional distribution even if it wanted to.
Imagine trying to set regional central bank interest rates. Counterparties would turn up for the lowest deposit rate, and the highest lending rate, and then lend on to others confronting less favourable rates, being set to achieve some regional goal. Without policing the regional destination of onward lending, and in fact instituting separate regional currencies, you could not sustain regionally divergent risk free interest rates.
Regional macro-pru might be possible, but again it would be hard to police intermediation arbitrage without essentially going as far as instituting regional financial authorities.
Regional purchases of local government bonds would be possible, but most of the time would not make much difference [assuming that they were ultimately reversed, and not regionally differentiated monetary finance]. Regional purchases of private sector bonds would be possible; but the market is not large, and currently concentrated with London and South East issuers, so such a policy could not make that much difference…. and we could go on.
Regional policy is for the government to sort out; it has the legitimacy to undertake the necessary deliberate redistribution. And it has the tools best suited to do it.
The Bank has a regional network of 12 Agencies
, which it advertises conducts 9k visits with business contacts per year, and hosts 60 visits with ‘policymakers’. My feeling is that it spends too much
effort, and with insufficient science, collecting its own regional information. We don’t ask the BoE to collect inflation or GDP data. Partly because we ask it to specialise in monetary and financial economics, not statistics [ok so they do collect monetary and bank balance sheet data…]. And partly because it does not look good to collect the data against which you will be subsequently judged. There is enough trouble with inflation and GDP truthers as it is. The Agency set up is an unwieldy mix between a PR/accountability function – the BoE has to be seen to be listening, and seeing the real activities of the real people and firms its policies affect, and taking its case to those constituent – and a dubious data gathering function.
If there is a failure – which I don’t see – how is the accountability system monitoring the Bank giving rise to it? And why could this not be addressed simply by giving regional concerns more weight in the hearings of MPC and FPC members? Moving BoE functions to Birmingham would presumably mean replacing a bunch of visits to Birmingham with a bunch of visits to London. How would policy be improved by that?
Despite all this, I am not particularly against moving the BoE.
As part of an orchestrated move to dismantle the success of London’s economy, and try to recreate it for a part of the country that had so far missed out, there is at least a case to argue. But we should not kid ourselves that it would help any actual policy that the BoE conducts.
I would propose something different. Rather than uprooting and dismantling successful institutions and local economies, squishing the London tax surplus in the process in the hope that it reappears somewhere else, preserve and spend that surplus on better transport facilities and universities in neglected areas.
Oh, and rename the Bank of England ‘The Central Bank of the United Kingdom’ and rotate MPC and FPC meetings through towns like Penrith, Bangor, Peterborough, Thurso and similar.