Blog: Economics in Action

Money seems to be disappearing. The value of homes has gone down and the banks are in huge amounts of debt and have to be bailed out by the government. But where has all of the money gone?

Money consists of two main elements.

Photo by thejonoakley on Flickr

The first is cash (notes and coins). The total amount of cash in the UK is just over £50bn, with about £43bn circulating outside the banks and £7bn in banks’ safes, tills and cash machines.

But cash is a relatively small proportion of the total amount of money. So what is the rest?

Read More: Where has all the money gone? John Sloman

With food prices very much in the news, and price rises causing unrest in vulnerable countries, FT.com provides a couple of interactive guides: “The Global Food Crisis” gives an overview in the form of clickable maps, and “Why are food prices rising?” explains some of the contributing factors with video clips.

A new research report calls for longer terms of office for members of the Bank of Englands Monetary Policy Committee (MPC). Writing in the Economic Journal, Brian Henry, Mathan Satchi and David Vines argue that this would guard against the potential danger of the MPC taking too short-term a view of the economy when setting interest rates.

Much attention has been given in the press as to whether new MPC appointments are doves or hawks. But past work by Charles Bean now the Bank’s chief economist but then an LSE professor implied that, providing the Bank remains properly independent, we should not really worry. Both hawks and doves will normally make roughly the same decision and both are likely to serve society well.

The new study by Professor Vines and colleagues shows that this conclusion is only valid if policy-makers take a long-term view of the economy. Policy-makers who take a short-term view are much more likely to disagree and may not serve society well.

(more…)

The Consumer Price Index (CPI) is the wrong measure of inflation for the Bank of England to target, according to new research by Professor Simon Wren-Lewis and colleagues. Writing in the Economic Journal, they argue that the UK’s monetary policy-makers should instead focus on a measure of output price inflation that is, changes in the price of goods produced rather than goods consumed.

The study reviews two arguments for a change of focus. The first suggests that if policy follows simple rules that relate interest rates to consumer price inflation, then instability may result because of the impact of interest rates on the exchange rate.

(more…)