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Abstract:
It is widely perceived that credit supply conditions faced by UK consumers, particularly in the mortgage market, have been liberalised since the late 1970s, with implications for the housing market and consumer spending. This paper examines quarterly microdata from the Survey of Mortgage Lenders to learn about changes in credit conditions from loan to value ratios (LVRs) and loan to income ratios (LIRs) of first-time buyers (classified by region and age). It combines data on the proportions of high LVR and high LIR loans with aggregate information on UK consumer credit and mortgage debt to give ten quarterly series for 1975-2001. These are modelled in a ten-equation system. A comprehensive set of economic and demographic influences on the demand and supply of credit, applying relevant sign restrictions, are controlled for. A single time-varying index of credit conditions captures the common variation in the ten credit indicators which cannot be explained by the economic and demographic controls. The broad coverage of credit market indicators and thorough investigation of economic forces driving the credit market should make the resulting credit conditions index more robust than previous estimates. The index increases in the 1980s, peaking towards the end of the decade. It retraces part of this rise in the early 1990s, before increasing again to levels, for one of the two measures, exceeding the previous peak. The index is useful in modelling consumption and the housing market, and in interpreting current monetary conditions. An important by-product of the paper is the model for consumer credit and mortgage debt developed here.

Abstract:
This Paper uses multi-step forecasting models at horizons of 4 and 8 quarters to forecast and explain the growth of real per capita US GDP. In the modeling strategy, a priori sign restrictions play an important role. They are imposed not on impulse response functions but directly on the reduced form single or multi-step equations, unlike in recent work by Uhlig and Canova. This is possible because in this context, the reduced form inherits important structural sign properties; basically, that autonomous expenditure has positive effects on near future GDP. We consider an economically large class of variables, including effects from interest rates, the credit channel and asset prices, the real exchange rate, yield spreads, inflation and interest rate volatility, oil prices (including asymmetries), structural breaks in fiscal and monetary policy, the recent behavior of consumption, investment and profitability, and the evolutionary effect of globalization on the balance of payments constraint. We follow a general to specific methodology, including the help of PCGETS (Hendry and Krolzig, 2001) to reduce general models to more parsimonious ones. Relative to conventional VARs, our models imply longer lag structures than ever considered in VARs, as well as non-linearities, and so could never have been found with conventional VAR restrictions. Our results thus contradict the suggestion of Sims (1980) that VARs can resolve the problem of 'incredible restrictions' embodied in large macro econometric models. Our exercise of learning from the data through general to specific modeling is likely, in many cases, also to contradict the lag structures of such models. We present a range of models with remarkable recursive forecasting performance since 1982 and show that similar models could have been selected with 1982 data by applying similar methods then. Out of sample forecasts with such models since March 2001, when we forecast that 2001 would be a recession year, have also been successful.

Business cycles, multi-step forecasting, fiscal policy, oil shocks, monetary policy

Abstract:
Economic conditions exert a strong influence on regional migration. On the one hand, strong labour market conditions, as exemplified by low unemployment rates and high earnings, draw migrants into regions. On the other hand, strong housing market conditions can prevent movement since commuting may often be an alternative to migration. This can be thought of as giving rise to a migration equilibrium where high house prices choke off migration caused by strong labour market conditions. Expected capital gains in housing, however, can offset high levels of house prices, an effect ignored in previous literature. Migration can also be influenced more directly by the availability of housing relative to population without this being mediated through prices. This paper, by Gavin Cameron, John Muellbauer and Anthony Murphy, presents evidence on inter-regional net and gross migration between the regions of England and Wales that is broadly in accord with these expectations.

Abstract:
Both unemployment and non-employment in Great Britain fell steadily after 1993. The ratio of jobs to the working age population - the employment rate - rose. But the increasing regional dispersion of employment rates remains a puzzle. By 2000-01, this dispersion was close to its 1974 and 1985 peak levels, though it has narrowed since 2001. This paper by examines this puzzle in the context of different measures of the employment rate and examines what we know and what we do not know about what drives relative employment rates across the British regions. It summarises the findings from an econometric study and examines the outlook for relative employment across the British regions.

Abstract:
This paper investigates the bubbles hypothesis with a dynamic panel data model of British regional house prices between 1972 and 2003. The model consists of a system of inverted housing demand equations, incorporating spatial interactions and lags and relevant spatial parameter heterogeneity. The results are data consistent, with plausible long-run solutions and include a full range of explanatory variables. Novel features of the model include transaction cost effects influencing the speed of adjustment, and interaction effects between an index of credit availability and real and nominal interest rates. No evidence for a recent bubble is found.

Bubble, ripple effect, house prices

Abstract:
We derive a comprehensive one-year ahead forecasting model of US per capita GDP for 1955-2000, examining collectively variables usually considered singly, e.g. interest rates, credit conditions, the stock market, oil prices and the yield gap, of which all, except the last, are found to matter. The credit conditions index is measured in the Federal Reserve's Survey of Senior Loan Officers and its importance is consistent with a 'financial accelerator' view. The balance of payments, exchange rate and fiscal policy also play a role. We address the Lucas critique, investigating consequences of monetary policy regime shifts in 1980, and fiscal policy regime shifts at the end of the 1980s. The model forecasts the most severe growth reversal in 2001 since 1974.

Lucas critique, macroeconomic forecasts, monetary policy transmission, oil prices, the credit channel, the financial accelerator, US recession

Abstract:
Forecasting models for output are presented to throw light on monetary transmission. Recent research finds multistep forecasting superior to recursive forecasting from a VAR model when structural breaks are present; there are important political and policy regime breaks in South Africa. The equilibrium correction models have a four-quarter ahead forecast horizon, appropriate for measuring interest rate effects. A stochastic trend measures underlying shifts in productivity and other supply side trends. The inclusion of important monetary policy regime shifts, which altered the output response to interest rates, and the control for other structural changes (e.g. trade liberalization), address the Lucas critique in forecasting output growth. There are important and persistent effects of high real interest rates, which significantly constrained growth in the 1990s, and significant potential growth benefits from fiscal discipline. South African growth appears to have become more responsive to the exchange rate with increasing trade openness in the 1990s.

Monetary policy transmission, multi-step forecasting, growth, structural breaks

Abstract:
Her Majesty's Treasury is due to report in June 2003 on the economic case for the UK adopting the Euro. One criterion concerns the extent of economic convergence between the UK and the European Union countries. Differences in financial, credit and housing institutions between countries present one important subset of constraints to sustained convergence (Maclennan et al, 1998) - largely neglected in the economic literature on common currency areas. These types of differences create tension within the Eurozone. Empirical evidence supporting these concerns has emerged in signs of overheating in the Netherlands, UK and some of the fringe economies, and in the relative stagnation of Germany and Italy. The UK's buoyancy, however, is accompanied by serious economic imbalances, with consequent risks of instability. These would be exacerbated should the UK be prematurely locked into an exchange rate and interest rate regime unresponsive to domestic conditions. There is much to learn from European experience: from Germany and Italy, on the consequences of illiberal economic structures; from The Netherlands, on some of the risks of liberal credit markets; and from Denmark, with a liberal credit market but rational property taxation. In this paper, John Muellbauer argues that convergence does not have to be fully achieved, if there is a counterbalancing policy instrument to mitigate some of the effects of these slow-to-dissipate differences. Specifically in the UK, a reformed system of property taxation would contribute greatly to long-term stability and the preservation of economic balance.

Abstract:
Economic conditions exert a strong influence on regional migration. On the one hand, strong labour market conditions, as exemplified by low unemployment rates and high earnings, draw migrants into regions. On the other hand, strong housing market conditions can prevent movement since expensive housing can deter migrants and commuting may often be an alternative. This can be thought of as giving rise to a migration equilibrium, where high house prices choke off migration caused by strong labour market conditions. Expected capital gains in housing and expected earnings growth however, can offset high levels of house prices, effects ignored in previous literature. Migration can also be influenced more directly by the availability of housing relative to population without this being mediated through prices. This paper presents evidence from a 28 year panel on net and gross migration for the regions of Britain that is broadly in accord with these expectations.

Regional migration, house prices, expected capital gains, contiguity, Great Britain, regional panel

Abstract:
The liberalisation of credit constraints in the 1970s for UK consumers has had important implications for the housing market and consumer spending. This paper by John Muellbauer examines the factors that have driven soaring consumer debt and house price levels; in particular those observed since the mid-1990s. By relying on recent econometric evidence and trends in credit availability, real income per head, nominal and real after tax mortgage rates, measures of perceived risk and broad demographic trends, it also analyses the prospects for house prices, mortgage debt and unsecured debt over the coming years. The outlook is for a 'soft landing' in the housing market and associated declines in the rate of growth of consumer debt, which, although probably not smooth, does suggest the underlying situation is more benign and less crisis-prone than it was in 1988-89.

Abstract:
It is widely perceived that credit conditions for UK consumers, particularly in the mortgage market, have been radically liberalized since the 1970s. The implications for the housing market and consumer spending have been important. This article by John Muellbauer draws on a 1997 paper by the author which examined data from the Survey of Mortgage Lenders to learn, from information about loan-to-value ratios of first-time buyers, classified by region, about changes in mortgage credit conditions. By controlling for economic and demographic influences on credit conditions, a single time-varying index of mortgage credit conditions was extracted from these SML data. This index rises in the 1980s, peaking towards the end of the decade. It retraces part of its rise in the early 1990s before rising again by 1995 to a level not far below the previous peak. The article considers whether more recent data suggests a further liberalisation of mortgage credit conditions. It draws on joint research with others to discuss possible implications for consumer spending, house prices, the volume of property transactions and mortgage defaults.

Abstract:
Market values of components of household sector wealth are important explanatory variables for aggregate consumer expenditure and household debt in macro-econometric models. We construct the first coherent set of the main elements of household-sector balance sheet estimates at market value for South Africa. Our quarterly estimates derive from published data on financial flows, and other capital market data, often at book value. Our methods rely, where relevant, on accumulating flow of funds data using appropriate benchmarks, and, where necessary, converting book to market values using appropriate asset price indices. Relating asset to income ratios for various asset classes to asset price movements and other features of the economic environment, throws light on the changing composition of household sector wealth. Most striking are the relative rise in the value of pension wealth and the trend decline of directly held securities, the decline and recent recovery of housing wealth, and the rise in household debt and concomitant decline of liquid assets from the early 1980s to the late 1990s.

Abstract:
This paper analyses the roles of property and land values in the UK economy and considers property tax reform with the objectives of improving macro-economic stability, resource allocation, economic inequality and the environment. With UK house prices at all-time peaks relative to incomes, concerns about affordability and the distributional consequences have increased. The Barker Review for the UK Treasury of new housing supply reported in 2004 and recommended extensive reforms of the land use planning system, as well as various other reforms, including new development taxes. This paper argues that these taxes are unwise compared to the property tax reforms proposed here.

Abstract:
Many factors have contributed to the development of credit markets, easing access of households to credit. This paper considers the implications of easier credit for the influence of higher house prices on consumer expenditure. It argues that with poorly developed credit markets, the effect is likely to be negative, but becomes positive as access to housing collateral increases and down-payments for first time home buyers fall in relation to values. The implications for differences between countries and changes in consumer behaviour over time are explored. Previous studies are reviewed: the omission of credit liberalization and other controls has often biased estimates of housing 'wealth' effects on consumption. New empirical estimates for the UK and US suggest that there was no housing 'wealth effect' before credit market liberalization, but that the housing collateral effect is now significant, larger than the stock market wealth effect, and about twice as large in the US as the UK.

Consumer expenditure, credit channel, housing wealth

Abstract:
In common with many emerging market countries, South Africa's government does not publish balance sheet wealth estimates on a market value basis, as produced in the US, UK, Japan, and elsewhere. Yet without information on the market values of liquid and illiquid personal sector wealth, it is difficult to explain aggregate consumer spending and saving, consumers' demand for credit, and the broad money holdings of households. Behavioral equations for these variables are key components of central banks' macro-econometric models, used in forecasting and policy-making. Understanding the domestic asset value channel of the monetary policy transmission mechanism is especially important for inflation targeting countries. We construct the first coherent set of aggregate, personal sector wealth estimates at market value for South Africa. Our quarterly estimates derive from published data on financial flows, and various other capital market data, often at book value. Our methods rely, where relevant, on accumulating flow of funds data using appropriate benchmarks, and, where necessary, converting book to market values using appropriate asset price indices. Relating asset to income ratios for various asset classes to asset price movements and rates of return, throws light on the changing composition of personal sector wealth. Most striking are the rise in pension wealth - overtaking gross housing assets in the late 1980s; the rise in household debt; and the relative decline of liquid and housing assets, from the early and mid-1980s, respectively.

National balance sheets, personal sector wealth, saving

Abstract:
This paper examines the evolution of monetary policy in South Africa in 1994-2004 in terms of design, the operational framework, the South African Reserve Bank's (SARB) understanding of monetary policy transmission and the transparency, credibility and predictability of monetary policy. Quantitative indexes of transparency in 1994 and 2004 are compared and expectations data and forward interest rate data used to assess the credibility and predictability of policy under inflation targeting. The forecasting performance of the SARB is evaluated, and monetary policy decisions taken in response to external and domestic shocks assessed. The impact of monetary policy on the level of real interest rates and the role for complementary policies are examined.

Inflation targeting, monetary policy, South Africa

Abstract:
This paper documents the role of consumption in explaining the weak interest rate effect of monetary transmission in Japan. Economic theory suggests circumstances in which a rise in short term real interest rates can increase consumption, contrary to much conventional wisdom. This paper suggests that these circumstances are more likely to be prevalent in Japan and finds strong empirical evidence for a positive effect. Life-cycle theory also suggests that housing wealth effects on aggregate consumption including imputed rent are small and negative. Positive effects of the kind found in the UK and the US are due to the role of the credit channel. In countries where consumer access to credit is restricted, these restrictions can enhance the negative effect on consumption of higher house prices because saving for a housing deposit needs to be higher. Our evidence of a negative land price effect for Japan supports this hypothesis. We find no evidence of significant household credit market liberalization from a model for household debt in Japan. We also find evidence for a sizable negative effect on consumption from higher government deficits, suggesting fiscal policy also had limitations. These findings contribute to explanations of Japan's 'lost decade'.

interest rate effect on consumption, Japan's lost decade, Land prices and consumption, monetary transmission in Japan

Abstract:
Inflation targeting central banks will be hampered without good models to assist them to be forward-looking. Many current inflation models fail to forecast turning points adequately, because they miss key underlying long-run influences. The world is on the cusp of a dramatic turning point in inflation. If inflation falls rapidly, such models can underestimate the speed at which interest rates should fall, damaging growth. Our forecasting models for the new measure of producer price inflation suggest methodological lessons, and build in conflicting pressures on SA inflation from exchange rate depreciation, terms of trade shocks, collapsing oil, food and other commodity prices, and other shocks. Our US and SA forecasting models for consumer price inflation underline the methodological points, and suggest the usefulness of thinking about sectoral trends. Finally, we apply the sectoral approach to understanding the monetary policy implications of introducing a new CPI measure in SA that uses imputed rents rather than interest rates to capture housing costs.

forecasting inflation, homeowner costs in the CPI, PPI inflation, South Africa

Abstract:
It is difficult to obtain reliable measures of evolving openness to trade, despite its relevance to models of growth, inflation and exchange rates. Our innovative technique measures trade openness encompassing both observable trade policy (tariffs and surcharges) and unobservable trade policy (quotas and other non-tariff barriers), and such factors as capital controls, sanctions and dual exchange rates (often used in composite trade measures). The share of manufactured imports in home demand for manufactured goods is estimated in STAMP (Koopman et al., 2000) using measured trade policy and controlling for fluctuations in domestic demand, relative prices of imports and the exchange rate. The unmeasured trade policy component is captured by a smooth non-linear stochastic trend. The two elements of openness, the stochastic trend and the rates of tariffs and surcharges, are included in a model of wholesale price inflation in South Africa. The evidence suggests that increased openness has significantly reduced the mean inflation rate and has reduced the exchange rate pass-through into wholesale prices.

Inflation dynamics, modelling inflation, trade openness

Abstract:
South Africa in the 1990s became globally more integrated after years of isolation. Opening the trade and capital accounts gave impetus to a monetary policy regime change to inflation targeting from 2000, after a costly transitional period of monetary mismanagement with low policy transparency. Changes in openness can, however, disrupt the inflation forecasting on which targeting monetary policies depend. This chapter demonstrates how the central bank's own producer price inflation equation in its core model can be improved by taking account of greater openness, using both innovative time-series openness measures and a more conventional measure. The model has a greatly improved fit and stability over longer samples when also including the real exchange rate and the interest rate differential (making explicit the exchange rate channel of monetary transmission) and asymmetric food price inflation. Moreover, there is a role for the level of the output gap rather than simply a short-run effect, as in the central bank's model. This helps mitigate the arguments in current South African debate regarding the apparent unconcern of inflation targeting policy for the level of economic activity.

inflation dynamics, modelling producer prices, trade openness

Abstract:
Housing markets have multiple interactions with the rest of the economy and these are surveyed in this paper. The drivers of house prices include income, the housing stock, demography, credit availability, interest rates, and lagged appreciation, the latter a potential mechanism for overshooting. There is rather less agreement on the determinants of new construction, though planning constraints are widely seen as a major issue and one of the causes of the UK housing affordability problem. The paper argues that housing collateral and downpayment constraints are the key to understanding the role of house-price variations in explaining medium-term consumption fluctuations. Institutional variations between countries and over time account for major differences in linkages between house prices and economic activity. This illuminates debates about how monetary and other policy should react to house-price variations. The paper also discusses the role of housing markets in explaining regional migration and location decisions, intergenerational inequality, and restricting access of the less affluent to public goods, such as good schools, which are capitalized in local house prices.

house prices, consumption, monetary policy, credit conditions, institutional change

Abstract:
This paper reviews the design and performance of monetary policy in South Africa since 1994. Quantitative indexes of transparency reveal a strong rise in the transparency and accountability of monetary policy between 1994 and 2004. Inflation and interest rate expectations data and forward interest rate data are used to demonstrate the increased credibility and reasonable predictability of monetary policy since adopting inflation targeting in 2000. The South African Reserve Bank's view on monetary policy transmission channels is discussed, and its recent forecasting performance is evaluated. We find that monetary policy decisions taken in response to external and domestic shocks under inflation targeting have significantly improved relative to the preceding framework, though data quality has been a constraint. Further, inflation targeting has not disadvantaged potential investment in terms of the level of tax-adjusted real interest rates, while inflation has been in the target range since 2003. Finally, the important role for complementary policies to support monetary policy is motivated.

Abstract:
Between the late 1970s and late 1980s, the UK Regional Accounts data suggest a much smaller rise in the South East earnings premium and consequently a much smaller increase in the regional dispersion of earnings than do the other sources of data. We discuss several possible explanations for this discrepancy and conclude it was probably due to problems at the Inland Revenue in allocating tax records across the regions. The historical unreliability of the Regional Accounts has implications for economic research on regional consumption and convergence and may have caused the poorest regions to miss out on EU Structural Funds.

Abstract:
This paper models regional earnings and unemployment in the ten regions of Great Britain between 1972 and 1995, paying particular attention to their interaction and to the important influence of the housing market. In contrast to Blanchard and Katz (1992, 1997) for the United States, we find less persistence in British regional earning differentials but greater persistence in regional unemployment rates. We find no evidence of a negative effect of the overall unemployment rate on the earnings of men in non-manual, or women in full-time, employment and find a positive effect for women in part-time employment. However, for manual men, we find a significant elasticity of around -0.07, comparable with Blanchflower and Oswald (1994).

Abstract:
Inter-regional migration is influenced by relative employment and earnings opportunities. But strongly offsetting forces operate from relative house prices. Commuting, at least to contiguous regions, is often an alternative to migration. Relative employment and earnings opportunities should influence commuting rates in the same direction as migration rates. Given the commute/migrate trade-off, however, housing market forces should operate in the opposite direction, particularly for contiguous regions. This paper presents evidence on inter-regional commuting and migration in Great Britain which is broadly in accord with these expectations. Data for the 1980s and 1990s on net commuting are derived from the ratios of numbers of employees resident in a region to the number employed in that region using Labour Force Survey and Census of Employment data. Information on migration comes from the National Health Service Central Register. Given the evidence for the importance of portfolio demand and speculative volatility in the British housing market presented in Muellbauer and Murphy (1997), this paper documents the important transmission effects via regional labour markets, for example, increasing regional mismatch, of the forces that drive house prices in Britain. The paper suggests tax reforms which should ameliorate these problems.

Abstract:
Despite convergence pressures, differences in housing and financial market institutions across the 15 member states of the European Union are still enormous. This paper argues that they have profound effects on the responsiveness of output and inflation in the different countries to changes in short-term interest rates, as well as to asset-market shocks of external origin. The economic reasoning behind this claim is set out and the institutional differences are described. The paper assesses the sometimes conflicting empirical evidence on this issue. Barriers to convergence and implications for labour-market flexibility are discussed. The UK, Ireland, Finland and Sweden tend to cluster at one extreme of the relevant institutional characteristics. The paper concludes with a set of proposals for institutional reforms which would significantly reduce the tensions within EMU and the potential for instability in these economies entailed by EMU membership.