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.