Nuffield College, Members of the College, John Muellbauer

Annual Reports

Annual Report 2005-2006 (Expand/Collapse)

Annual Report 2005-2006 (2005-2006)

John Muellbauer (Official Fellow) devoted a substantial part of the year’s research to the further development, with Gavin Cameron and Anthony Murphy, of regional models of house prices, labour markets and regional migration discussed in last year’s annual report. In a CEPR discussion paper, they provide evidence that in 2003-05, UK house prices were not at ‘bubble’ levels, despite claims by the OECD and others that prices were 30 percent or more overvalued. The combination of income and population growth (in part due to immigration), and low rates of house building, were the main reasons behind the rise in real house prices since 1997, though lower real and nominal interest rates also contributed. This paper was presented at the Royal Economic Society annual conference, the Royal Statistical Society, the European Real Estate Society conference in Weimar and the Econometric Society conference in Vienna, and written up in the Financial Times. In another CEPR discussion paper, they show that the housing market plays a crucial role in explaining variations in inter-regional migration rates within Great Britain. Relative house prices, expected relative house price appreciation, and perceptions of downside risk all matter. Furthermore, the housing stock relative to population has a separate impact, probably reflecting the impact of the rental sector where rents tend to be sticky or controlled. Moreover, the omission of housing variables makes it hard to obtain sensible estimates of the effects on regional migration of earnings differentials between the different regions. With Janine Aron, a paper was written on the role of credit and housing wealth in explaining consumption, with empirical results contrasting the UK and South Africa. A review of the large international literature on housing wealth effects on consumption demonstrates that poor controls for other effects such as interest rates, credit availability, unemployment rates, income and other asset prices seriously contaminate the estimation of the housing wealth effect. In the UK, under current credit conditions, the housing wealth effect on consumer spending, which partly works through the collateral role of housing wealth in expanding credit, is about as large as the effect of illiquid financial wealth. The paper also shows how the credit market liberalisation since 1980 has resulted in substantial shifts in the way consumer spending reacts to interest rates, housing wealth and uncertainty. This paper was presented at an IMF research seminar in June and at HM Treasury in September. Interestingly, the Bank of England’s new quarterly model has broken down in modelling the housing wealth effect, shifting from an implausibly large effect on data up to 2000, to a zero effect when estimated on data up to 2005. Another paper with Janine Aron reviews monetary policy in South Africa in the first decade of democratic rule. Major improvements have taken place in the transparency and predictability of monetary policy since inflation targeting began in 2000, though data quality has been a constraint. Post-tax real interest rates in recent years have been at growth-encouraging levels, though asset price rises pose policy dilemmas. The paper was given at a major conference on economic performance in post-Apartheid South Africa in Stellenbosch in October 2005 co-organised by Janine and co-funded by DfID. With Janine Aron and Johan Prinsloo of the South African Reserve Bank, research was extended on constructing household sector wealth estimates for South Africa. The Reserve Bank will now publish wealth data in their Quarterly Bulletin using the Aron-Muellbauer methodology. With Janine Aron and Johan Prinsloo he participated in the UN project at WIDER, on the world distribution of wealth, with two conference presentations in Helsinki. Professor Ben Smit, Director of the Bureau of Economic Research, South Africa’s premier national economic research institute, worked in South Africa and in Oxford with John and Janine Aron on a DfID funded project. Further progress was made on a small model for South Africa to evaluate policy related questions, such as measuring the speed of pass-through from the exchange rate into consumer prices, and evaluating the impact of the shift in the terms of trade on the exchange rate. John completed his three year spell as chair of the Economics Group at Nuffield, and interviewed PPRF candidates for the College and the Department at the AEA meetings in Boston. He continued as MPhil macro coordinator. He served as consultant to Oxford Economic Forecasting. He spoke at a number of conferences, in particular on the themes of credit markets, and property taxation. Publications

(with J. Aron) ‘Estimates of Household Sector Wealth for South Africa, 1970-2003’, Review of Income and Wealth, 52: 2, 285-308, 2006.

(with J. Aron and J. Prinsloo) ‘Estimating Household Sector Wealth in South Africa’, Quarterly Bulletin, South African Reserve Bank, June, 61-72, 2006.

(with J. Aron) ‘Monetary Policy, Macro-stability and Growth: South Africa’s Recent Experience and Lessons’, World Economics, 6:4, 123-47, December, 2005.

(with others) Affordability Targets: Implications for Housing Supply. Office of the Deputy Prime Minister, HMSO: London, November 2005.

(with G. Cameron and A. Murphy) ‘Bubble Trouble – Are British House Prices

Significantly Overvalued?’, Economic Outlook, 30:2, 19-29, April 2006.

‘Property Taxation and the Economy’, in Dominic Maxwell and Anthony Vigor (eds.), Land Value Tax: Worth the Transition? London: Institute for Public Policy Research, 2005.

Annual Report 2004-2005 (Expand/Collapse)

Annual Report 2004-2005 (2004-2005)

John Muellbauer (Official Fellow) devoted a substantial part of the year’s research to the development with Gavin Cameron and Anthony Murphy of a regional model of house prices, labour markets and regional migration. This was the core part of a project on Housing Affordability commissioned by the Office of the Deputy Prime Minister and co-ordinated by Professor Geoff Meen of Reading. Altogether 14 economists from five Universities worked on this project, which began in November and produced a final report in May 2005. House price to earnings ratios now far exceed previous records in all regions of the UK. ODPM’s aim is to understand what will be the impact of expanding housing supply in the different regions on affordability, which they define by the ratio of the lower quartile of house prices to the lower quartile of individual earnings. This requires an understanding of all the important feedbacks. For example, if more house building in the South East largely attracts more migrants into the region, there may be little impact on affordability. This path-breaking model enables such questions to be answered. At the time of writing, the final report has not yet been released by ODPM, given the political sensitivities involved. However, a large amount of additional work towards completing a series of papers on regional employment and unemployment, regional migration (presented at a Departmental workshop) and the regional housing markets has been carried out.

John hosted several overseas visitors. The first of these was Keiko Murata from the Japanese Prime Minister’s Cabinet Office with whom John worked on several themes. The first was forecasting Japanese per capita GDP and household non-property income using methods developed as part of John’s ESRC continuing research programme with Adrian Pagan, ‘Improving Methods for Macroeconometric Modelling’. The second used these forecasts to help understand Japanese consumption and household saving behaviour. In turn, this has helped understand the monetary transmission mechanism in Japan.

Unlike the UK, the consumption function for Japan shows a negative real land price effect: when real land prices rise, young households and other renters have to save more. This dominates the wealth effect for older households, partly because of the inheritance tax advantages in Japan of leaving housing assets to one’s children. Other factors include the relatively uncompetitive nature of the banking sector in Japan, as well as Japanese attitudes to risk. The demand stimulus from lower short-term rates is thus far less in Japan than the UK.

Professor Ben Smit, Director of the Bureau of Economic Research, South Africa’s premier national economic research institute, came to work with John and Janine Aron on a DfID funded project. Progress was made on a small model for South Africa to evaluate policy related questions, such as measuring the speed of pass-through from the exchange rate into consumer prices, and evaluating the impact of the shift in the terms of trade on the exchange rate. Johan Prinsloo, from the South African Reserve Bank was another visitor and John and Janine worked with him on a return visit to the Reserve Bank on incorporating household sector wealth estimates for the first time into South Africa’s national accounts. For the same DFID project, Janine and John completed a 70 page evaluation of monetary policy in South Africa in the first decade of democratic rule. South Africa introduced inflation targeting in 2000 and there are many signs of improvements in policy transparency and predictability. Though policy was put under strain by the exchange rate volatility of 2001-2, interest rate policy performed well given the information at the Reserve Bank’s disposal. However, South Africa was not well served by serious data errors, which led to consumer headline inflation being overstated by 2.3 percent by March 2003. Janine and John published an article on problems in measuring inflation in South Africa. In the absence of a handbook published by Statistics South Africa, this involved detective work of amazing complexity.

Regarding the ESRC project mentioned above, further progress was made with Luca Nunziata, forecasting GDP growth one year ahead in the G7 countries. Heiko Hesse contributed to the German model. There are many satisfying parallels in the role of asset prices, interest rates and oil prices in the different countries, but also signs that institutional differences matter. In the course of the year, Luca Nunziata took up an appointment as Associate Professor at the University of Padua. The project is fortunate that Anthony Murphy, Senior Lecturer in Economics at University College, Dublin will be able to work join it for the last 12 months.

This year also saw the completion of final drafts of four DPhils supervised by John, one successfully examined, three to be examined in Michaelmas, 2005. The disruption (and ultimate pleasure) of moving house contributed to making this a busy year. John continued as chair of the Economics Group at Nuffield and interviewed PPRF candidates for the College and the Department at the AEA meetings in Philadelphia. He continued as MPhil macro co-ordinator. He served as consultant to Oxford Economic Forecasting. He spoke at a number of conferences, in particular on the themes of credit markets, and property taxation.

Publications

(with Janine Aron) ‘Construction of CPIX Data for Forecasting and Modelling in South Africa’, South African Journal of Economics, 72, 5, 1-30, 2004.

‘Property Taxation and the Economy after the Barker Review’, The Economic Journal, 115, 502, 99-117, 2005.

‘UK Household Debt: A Threat to Growth or Stability?’, Economic Outlook, 29, 1, 5-10, 2005.

(with Gavin Cameron and Anthony Murphy) ‘Migration Within England and Wales and the Housing Market’, Economic Outlook, 29, 3, 9-19, 2005.

(with Gavin Cameron) ‘Why Do Employment Rates Differ Across the Regions of Britain?’, Economic Outlook, 28, 5, 14-22, 2004.

Annual Report 2003-2004 (Expand/Collapse)

Annual Report 2003-2004 (2003-2004)

John Muellbauer (Official Fellow) served as a consultant to the Barker Review of Housing Supply, helping to edit the Interim Report published in December 2003 and took part in a number of meetings at the Treasury and the Office of the Deputy Prime Minister. John gave presentations on this theme and policy options for stabilising the housing market to the British Property Federation annual conference, Brighton, the Joseph Rowntree Foundation, the Royal Economic Society Conference, Swansea, the European Network of Housing Research conference in Cambridge and to the European Central Bank. He also took part in several media and other public discussions of the issues.
A paper with Luca Nunziata extending earlier research on forecasting the US business cycle finally appeared as a CEPR discussion paper. The methods presented are strikingly better at forecasting business cycle turning points than standard methods and the Survey of Professional Forecasters. An early version was presented at the Federal Reserve Board in Washington as a Visiting Scholar, along with a paper on UK credit conditions. Work began on extending the approach to the rest of the G7 economies. Already, interesting differences between economies in the impacts of asset prices have come to light.
Joint research with Gavin Cameron on regional differentials in UK labour markets and on mortgage arrears continued. The website housingoutlook.co.uk continues to attract attention.
A presentation based on work with Olympia Bover of the Bank of Spain on measurement issue in international house price indices and their implications for central banks was presented at a European Central Bank/Bank of Spain/CEPR conference in Madrid.
Work with Justin van den Ven on deducing the attitudes of governments to households of different types by examining tax and benefit systems reached completion. The evidence suggests the Australian government treats households of different types fairly consistently. Preliminary evidence for the UK suggests that this is not the case here.
Research on South Africa with Janine Aron has continued under the third consecutive grant from DFID, beginning in October 2003. South Africa began inflation targeting in 2000. Four new working papers were produced this year. The first is a multi-equation inflation model of the inflation process in South Africa, which helps explain the speed and extent of exchange rate pass-through, and the various channels of monetary transmission. Inflation is a far from homogeneous phenomenon, a fact ignored in most work on consumer price inflation. A second paper uses a novel methodology grounded in theory, to model the ten sub-components of the consumer price index (excluding mortgage interest rates, or CPIX) for South Africa.
While the CPIX measure became relevant to monetary policy setting and wage contracts only from 2000, and is published monthly only from 1997, a far longer time series is required for the forecasting and modeling exercises of the South African Reserve Bank (SARB), National Treasury and others. In a third paper, previously unavailable estimates of CPIX back to 1970, were produced on a consistent methodology, using monthly price indices, the appropriate weights, and linking correctly when rebasing. This paper contains the only technical account of the methodology of construction of the consumer price index (CPI) and CPIX by Statistics South Africa, in the absence of any published official technical bulletins.
The fourth paper constructs the first coherent set of aggregate, personal sector wealth estimates at market value for South Africa. This research has lead to joint work with the SARB, with a senior economist visiting Nuffield in September, 2004. Extending this work, the resulting measures of net total wealth and liquid and illiquid wealth are planned to be published regularly in the Quarterly Bulletin of the SARB, and used in their macro-model for the first time.
Presentations from this project were given at the IMF, the South African Reserve Bank, the South African Treasury, various South African universities and the Economic Association of South Africa, as well as in seminars in Oxford and at the Econometric Society Meetings in Madrid.
John was chair of the Economics Group at Nuffield and interviewed PPRF candidates for the College and the Department at the AEA meetings in San Diego.
Publication
(with Justin van de Ven) ‘Equivalence Scales and Taxation’, in C Dagum and G Ferrari (eds.), Household Behaviour, Equivalence Scales, Welfare and Poverty. New York: Physica Verlag, 2003, pp 85-106.

Annual Report 2002-2003 (Expand/Collapse)

Annual Report 2002-2003 (2002-2003)

John Muellbauer (Official Fellow). Two funding applications were successful this year. The first was to the Economic and Social Research Council (ESRC) for a three-year project with Adrian Pagan, with the theme: ‘New Methods for Improving Macroeconomic Modelling’. The second, with Janine Aron, was to the Department for International Development (DFID), which has funded three consecutive grants on macro-economic research in South Africa, spanning nearly seven years. The aim is to complete the South African research programme in the current project: ‘Monetary Policy Growth and Stability in Sub-Saharan Africa’. A new website was added to the Departmental website, with research papers (and non-technical summaries) for these DFID projects.
John served as a consultant to the background work for the Treasury’s ‘Five Economic Tests’, and submitted his own paper as part of the invited submissions from academics. The case he has developed over some years emerged as the centre-piece of the Treasury’s argument for delaying entry – that institutional features of the UK’s credit and housing markets are a major impediment to adoption of the Euro. He gave evidence to the ‘Barker Review of the supply of housing in the UK’; and has participated in various related meetings with Treasury economists. He also spoke on policy issues and the housing market outlook at conferences organized by Oxford Economic Forecasting and Merrill Lynch, and in the media.
Work continued with Luca Nunziata on the ESRC grant extending earlier research on forecasting the US business cycle. Joint research continued with Gavin Cameron on regional differentials in UK labour markets, and with Justin van den Ven on taxation and equivalence scales. A paper for the Bank of England, with Emilio Fernadez-Corugedo, on constructing a consumer credit conditions index for the UK, was revised to its final version, and presented at the Money, Macro and Finance Conference in Cambridge in September.
The South African research component focused on modelling and forecasting inflation using novel techniques. A seven-equation model of the inflation process was developed in a joint paper with Janine Aron and Ben Smit (Bureau of Economic Research, South Africa), and presented at the South African Reserve Bank and as a keynote address at the African Econometrics Society Meeting in July. This research gives important insights into the monetary policy transmission mechanism, taking care to address changing economic and policy regimes in South Africa. With further development in the current project, it will be possible to estimate more rigorously than hitherto, the degree of ‘pass-through’ of exchange rate shocks into inflation. A second paper with Janine Aron and Coen Pretorius (South African Reserve Bank), also recently presented in South Africa, uses an innovative approach to forecasting the sub-components of the consumer price index. A joint paper is being prepared with Johan Prinsloo (South African Reserve Bank), examining the feasibility of adding national balance sheets to the flow of funds already produced by the Reserve Bank. Contact with the Office of National Statistics was very helpful in this regard. The aim is to link these measures to the historical personal sector wealth estimates constructed in a recently revised paper with Janine Aron, to provide long series on wealth stocks. Such measures prove very important in modelling consumption and money demand in South Africa.
Publications
(with Janine Aron) ‘Interest Rate Effects on Output: Evidence from a GDP Forecasting Model for South Africa’, IMF Staff Papers, 49, 185-213, 2002.
‘The UK and the Euro – the Role of Asymmetries in Housing and Credit Markets’, in Submissions on EMU from Leading Academics, HM Treasury, June, 185-196, 2003.
‘The UK and EMU: Lessons from Europe’, Economic Outlook, 27, Winter, 13-21, 2003.
‘Housing, Credit and the Euro: the Policy Response’, Economic Outlook, 27, Summer, 5-13, 2003.

Annual Report 2001-2002 (Expand/Collapse)

Annual Report 2001-2002 (2001-2002)

John Muellbauer (Official Fellow). The ESRC-supported project held jointly with David Hendry and Bent Nielsen, ‘Modelling Non-stationarity in Economic Time Series’ was completed at the end of 2001 and was awarded an ‘outstanding’ grade by the ESRC. An application to the ESRC for a new 3-year project with Bent Nielsen, Gavin Cameron, David Hendry and Adrian Pagan was submitted. The theme of the new proposal is ‘New Methods for Improving Macroeconomic Modelling’. Work continued on the two-year project with Janine Aron funded by the Department for International Development (DfID): ‘Governance and Inflation Targeting in South Africa for Sustainable Growth’. This involves further modelling of the inflation process in South Africa, an examination of the efficiency of possible monetary policy rules and improvements in institutional design. An innovative feature of our inflation forecasting work with the South African Reserve Bank is to model the components of inflation to improve the overall inflation forecast. This has proved highly topical, given the exchange rate and food-price inspired inflation burst in South Africa in 2002. With Chris Adam, Janine Aron, and David Bevan, John applied to DfID for a 5-year Development Research Centre on the macroeconomics of low-income countries (to be based at Oxford’s Economics Department).
An invited paper with Janine Aron on forecasting growth in South Africa one year ahead, exploring the impact of interest rates on output, was presented at the IMF’s 2nd Annual Research Conference and is to appear in IMF Staff Papers. Work continued with Luca Nunziata on a quarterly version of a US GDP forecasting paper. Work also continued with Gavin Cameron on several U.K. housing market issues, including mortgage defaults.
This year saw the completion of a project for the Bank of England with Emilio Fernandez-Corugedo on consumer credit and mortgage markets in the UK. Major structural changes have taken place in these markets since the late 1970’s, resulting in much higher loan-to-value and loan-to-income ratios becoming available for mortgage borrowers. Correspondingly, these have allowed the ratios of consumer credit and mortgage debt to household income to rise strongly. We use micro data from the Survey of Mortgage Lenders and data on household debt aggregates to extract a non-price credit conditions index, after controlling for many economic and demographic influences on credit. This index is likely to prove important in explaining other features of personal sector behaviour: consumer spending, the demand for broad money, house prices and housing market turnover, and mortgage default rates. As argued in a keynote talk at the Vienna conference of the European Housing Research Network, these changes in UK credit conditions are the temporal expression of some of the basic cross-country institutional differences between the UK and core Eurozone economies, which are liable to prove problematic for the UK’s adoption of the Euro, and are already a source of tension for the common monetary policy between some members of the Eurozone.
New research with Justin van de Ven examined the question of how to identify in principle and estimate in practice, the equivalence scales implicit in a country’s tax and benefit system. Equivalence scales are used in studies of income inequality and redistribution to adjust income levels of households of different compositions to a comparable basis. It is often argued that equivalence scales are incompatible with social benefit and tax regimes used in many countries, but this is not the case in our framework.
John contributed to a seminar of the Cabinet Office’s Performance and Innovation Unit on geographical mobility, and was invited to comment on preparatory work by the Treasury on the five economic tests for EMU.
John completed his second year as college investment bursar for the non-property portfolio in one of the most trying periods for equity markets since the Second World War.
Research papers were presented at the Bank of England, the South African Reserve Bank, at Oxford, several Oxford Economic Forecasting conferences and at the European Meetings of the Econometric Society in Venice, as well as the ENHR and IMF conferences already mentioned.
Publications
(with Gavin Cameron and Jonathan Snicker), ‘A Study in Structural Change: Relative Earnings in Wales Since the 1970s’, Regional Studies, 36, 2002.
‘Mortgage Credit Conditions in the UK’, in Economic Outlook. Oxford: LBS/OEF, 2002.

Downloadable research papers

"Consumption, Land Prices and the Monetary Transmission Mechanism in Japan." Chapter in Japan's Bubble, Deflation and Long-term Stagnation. (forthcoming MIT Press 2009, published via the ESRI, Cabinet Office, Japan). (with Keiko Murata, Cabinet Office, Japan). [For conference, San Francisco Federal Reserve, 11-12 December, 2008] [Earlier workshop: a joint ESRI/Center on Japanese Economy and Business, on Japan’s lost decade, Columbia University, March 21, 2008.]

“US House Price and Credit Constraints.” (with John Duca, Federal Reserve). CEPR and European Area Business Cycle Network, Pompeu Fabra, Barcelona, 22nd November, 2008.

Special Issue on Housing Markets and the Economy, Oxford Review of Economic Policy, Oxford University Press 24(1), 2008. (Guest Editor with A. Murphy) & "The Assessment: Housing Markets and the Economy.” in Muellbauer, J. and A. Murphy (Guest Eds.) Special Issue on Housing Markets and the Economy, Oxford Review of Economic Policy, Oxford University Press 24(1): 1-33, 2008.

"Housing and Personal Wealth in a Global Context." Chapter in James B. Davies (ed.), Personal Wealth from a Global Perspective, UNU-WIDER Studies in Development Economics, Oxford University Press, October, 2008, pages 293-311. (also, United Nations University, WIDER Research Paper 2007-27, November, Helsinki).

"Housing, Credit and Consumer Expenditure." in ) Housing, Housing Finance, and Monetary Policy, A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 30 - September 1, 2007, pages 267-334. Annual series: Federal Reserve Bank of Kansas City.

‘Equivalence Scales and Taxation’, in C.Dagum and G.Ferrari (eds), Household Behaviour, Equivalence Scales, Welfare and Poverty. New York: Physica Verlag, 2003, p85-106. (with J. van de Ven)

Economic Outlook Articles (OEF), Policy Related Reports/Papers

Aron, J. and J. Muellbauer. 2009. "US Deflation? New Methods of Forecasting Consumer Prices." Economic Outlook (forthcoming February 2009).

“Property Taxation and the Economy.” in Land Value Tax: worth the transition? (eds) Dominic Maxwell and Anthony Vigor, Institute for Public Policy Research, 2005.

South African Research on Monetary Policy and Macroeconomics

"Some issues in modelling and forecasting inflation in SA.” Chapter in Challenges for Monetary Policy-makers in Emerging Markets." (forthcoming 2009, published by the SA Reserve Bank). (with J. Aron).

"Monetary Policy and Inflation Modeling in a More Open Economy in South Africa." Chapter in New Monetary Policy Frameworks for Emerging Markets: Coping with the Challenges of Financial Globalization, Gill Hammond, Ravi Kanbur and Eswar Prasad (eds.), Bank of England/Edward Elgar (forthcoming, 2009). (with J.Aron). (also CSAE Working Paper 2008-28, Department of Economics, Oxford, or CEPR Discussion Paper 6992, London, 2008)

"The Development of Transparent and Effective Monetary and Exchange Rate Policy." Chapter 3 in Aron, J., B. Kahn and G. Kingdon (eds.) South African Economic Policy Under Democracy, Oxford University Press (forthcoming, March, 2009). (with J.Aron).

Research Interests

Annual Reports

Biographical Sketch

Downloadable research papers

Media Articles and Talks

UK and International Papers

Economic Outlook Articles (OEF), Policy Related Reports/Papers

South African Research on Monetary Policy and Macroeconomics


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