Ray Barrell's picture
Affiliation: 
Brunel University London
Credentials: 
professor of economics

Voting history

Labour Markets and Monetary Policy

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Question 2: Do you agree that, in a period of great uncertainty and after a prolonged period of weak real wage growth, monetary policy makers can afford to wait for greater certainty about real wage developments and building inflationary pressure before raising interest rates?

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Answer:
Disagree
Confidence level:
Confident
Comment:
All periods over the last thirty years appear to have involved great uncertainty, and today looks less uncertain than, say 2008-9, and no worse than average. It just happens to be today, so people worry about it. After nearly ten years of weak wage growth it would be a good bet that this will continue, and policy should be based on this assumption. Policy can be flexible if this is not the case. The labour market might change, and weak technical change and slow growth in labour input quality may suddenly switch to higher growth. But then, both could also slow even further. Risks are not always symmetrical, and higher rather than lower growth of earnings may be more likely, but the most likely outcome is that this year will be like the last five years. Uncertainty is not a reason for inaction. Policy makers could afford to wait in raising interest rates, but it would be best if they raised rates now. Small changes in interest rates have very little impact on either output or inflation. A delay may mean larger increases in future for the same inflationary pressures, and these larger, delayed movements may involve more costs than several, more timely, small increases in rates. The costs of acting too early are small, coming mainly through the exchange rate. Interest rates should start to rise now and rise twice more this year.

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Question 1: Do you agree that a strong labour market is a good indicator of building inflationary pressure?

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Answer:
Agree
Confidence level:
Confident
Comment:
Low unemployment along with reasonable employment growth give a good indication that the labour market is strong, and that inflation might rise. We are in a position where unemployment looks low, and inflation is above target. Hence a rise in interest rates could be justified. However, labour markets are more complex than the poor description of them given by the Phillips Curve. The ‘Curve’ is at best a statistical description of a reduced form relationship and at worst an empirical mirage. Even if we assume that there is at any point in time a unique equilibrium unemployment rate, we do not know what it is, but we do know it changes all the time. Equilibrium unemployment will depend upon the factors affecting the demand for and supply of labour, as well as on the direct and indirect tax rates and the real exchange rate, and these are not constant. Even if they were unchanging, technical progress and changes in average labour quality determine equilibrium real wage growth, and these also change over time with rates of innovation, migration and other factors. We work in the dark, but careful analysis of data can help us find our way. It would all be easy if we knew what equilibrium unemployment currently is, but we do not. If unemployment is below the equilibrium then wages should rise more than would be anticipated, and this would lead to increases in costs and hence rises in prices. This would be a good indicator of potential inflationary pressures, and monetary policy could mechanically respond. We are not in that world, and probably never have been. Judgements have to be made, but they must be based on more information than can be summarised in a shifting and unstable Phillips Curve. The ‘Curve’ is a useful teaching tool, and of value for commentators, but of little use for serious policy decisions.

House Prices and the UK economy

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Question 2: Do you agree that a more widespread weakening of the UK housing market will slow UK GDP growth significantly?

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Answer:
Strongly agree
Confidence level:
Extremely confident
Comment:
A more widespread weakening of the UK housing market would slow consumption growth and hence reduce GDP growth. The initial slowdown could itself be evidence of anticipated slower GDP growth, but it would still feed-back and reduce consumption. The effects could be significant in the short term if the anticipated fall in house prices is fully taken on board by consumers, but it is more likely to be a continual drag on growth as the negative implications for incomes of exit from the EU slowly become clear. In addition, weak house prices may reduce entrepreneurial activity and business investment, as many small ventures are initially financed on the back of loans secured on residential property. Housing wealth affects consumption for the same reasons that government debt is part of wealth, as Barrell and Weale (2010) discuss. Barrell et.al. (2015) present evidence of the relative impacts of financial and housing wealth on consumption in the UK, and show that housing wealth has larger and more significant effects on consumption. These effects can be noticeable, as we have seen in the last three housing cycles in the UK over the last 30 years. The impact of the use of residential property as collateral on investment behaviour is discussed in Bahaj et al (2017). They suggest that house price falls could noticeably and negatively affect investment growth in the UK. Bahaj, S., Foulis, A., and Pinter, G., (2017) ‘Home Values and Firm Behaviour’ Bank of England, mimeo Barrell, R., Costantini, M., and Meco, I., (2015) ‘Housing wealth, Financial wealth, and Consumption: new evidence for Italy and the UK’ International Review of Financial Analysis vol.42 pp.316-23 Barrell, R. and Weale, M. (2010) 'Fiscal policy, fairness between generations, and national saving'. Oxford Review of Economic Policy, 26 (1). pp. 38 – 47

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Question 1: Do you agree that the phenomenon of declining house prices will ripple out from the London property market leading more UK regions to experience falling prices?

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Answer:
Agree
Confidence level:
Very confident
Comment:
We should expect more moderate real house price growth in the UK over the next decade than we have seen over the last decade. Housing supply might rise. Housing demand growth will moderate, in part because the reality of the costs of exiting the EU will begin to be felt. House prices in the UK have been strong in recent years in part because population has been rising whilst housing supply has not. Migration has been one factor behind increased demand, and we will see it decline on exit from the EU. The impact on migration and on housing markets will be greatest in London and the South East as financial services incomes and employment contract noticeably. It is not surprising that we are already seeing house prices fall in London and the South East, and we can expect that they will fall relative to those outside the area. It is not very likely that prices will fall significantly elsewhere.

Global risks from rising debt and asset prices

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Question 2: Is the loose monetary policy of major central banks responsible for the recent increase in global leverage or asset values?

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Answer:
Agree
Confidence level:
Confident
Comment:
Asset prices must reflect the future discounted value of earnings. Low interest rates driven by loose monetary policy lead to high asset values. However, low real interest rates over the last few years in the advanced economies are not mainly the result of central bank policies, and these have contributed to high asset values. As such, high asset values may in part be sustainable if real interest rates stay low.

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