Economics in Action

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.

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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.

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Wages tend to rise in British firms taken over by US multinationals: on average, in the two years after an acquisition, skilled workers see their earnings increase by 8% while unskilled workers pay goes up by 13%. But there are no such effects for takeovers by multinationals from continental European Union countries.

These are the findings of new research by Holger GÃrg and Sourafel Girma, which explores whether acquisitions of British companies by foreign multinationals are a threat to domestic labour.

Their study, presented at the Royal Economic Society’s 2006 Annual Conference at the University of Nottingham, looks at one aspect of this topical question: whether wages change in firms after they have been taken over by foreign firms.

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Research by Steve Gibbons and Steve Machin confirms that there is a house price premium related to the performance of the nearest primary schools. But some of the findings of the study, published in the Economic Journal, run counter to common perceptions:

· A ten-percentage point improvement in the league-table performance (at age 11, Key Stage 2) can be expected to add at least 3% to the price of a house located immediately next to a school. As might be expected, houses further away are less affected.

· Despite this, primary schools are, in general not desirable local amenities. Only the 1-in-10 top performing schools tend to lift significantly the prices of houses close by.

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The governments introduction of the Working Families Tax Credit (WFTC) may have created more than 50,000 new couples, according to new research by Dan Anderberg.

His study, presented at the Royal Economic Societys 2006 Annual Conference at the University of Nottingham, finds that benefits like family tax credits and Income Support (IS) frequently subsidise or penalise the formation of partnerships according to whether two individuals are better or worse off as a couple than apart.

Anderberg finds that there is a sizeable response to these financial incentives: for example, a £100/week partnership penalty reduces the probability of having a partner by about seven percentage points.

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There is a strong link between the earnings of fathers and sons, according to new research by Professor Robin Naylor and colleagues. What’s more, the likelihood of a son having earnings similar to his father’s is greater for those born into particularly rich or poor backgrounds. And especially in the UK and the United States, the sons of earners in the top 20% are very unlikely to end up in the bottom 20% of earners.

The study, presented at the Royal Economic Society’s 2006 Annual Conference at the University of Nottingham, examines how intergenerational mobility compares between the UK, the United States and the Nordic countries of Norway, Denmark, Sweden and Finland. The main results are that:

Despite the commonly-perceived view of the US as an open society with ready opportunities for individuals to rise from poverty to affluence (from rags to riches), the evidence shows that the opposite is true. On average, a son’s earnings are more closely related to his father’s earnings in the United States than in any of the other countries.

In the UK, the connection between sons earnings and fathers earnings is weaker than in the United States, but stronger than in the Nordic countries. There is substantial earnings persistence across the generations in all countries.

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