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‘New tools’ to fight the slowdown

26 March 2009

Professor David Blanchflower (left) with Professor Bob McNabb, Dean of Cardiff Business SchoolProfessor David Blanchflower (left) with Professor Bob McNabb, Dean of Cardiff Business School

Professor David Blanchflower, a member of the Bank of England’s Monetary Policy Committee, has called for ‘new tools’ to deal with the wake of the credit crunch, in a speech at the University.

Professor Blanchflower, who took a Masters in Economics at Cardiff, has been an external member of the Monetary Policy Committee since June 2006. He was recently hailed by The Times as "the Bank’s professor who got his sums right", as he started calling for interest rate cuts in January 2008 - advice which was only adopted more recently.

In his lecture at Cardiff Business School, Professor Blanchflower discussed the key challenges facing monetary policy. He said that current research had little to say about bank lending, financial instability or house and asset price bubbles. "So we are largely starting from scratch," he said.

"We do not possess a coherent intellectual framework to describe how such macro-prudential instruments might operate and how they would interact with more traditional policy instruments such as the Bank Rate and the CPI inflation target. Providing such a framework will be a challenge."

Blanchflower said that monetary policy should in future take into account such factors as surging house prices as well as overall consumer price inflation. This would help prevent build-up of the imbalances which have worsened the present economic situation.

He warned: "A risk to the economic outlook relates to the rising level of unemployment in the economy. As redundancies rise and house prices fall, more British households will face the grim prospect of experiencing both unemployment and negative equity.

"Forced selling in the housing market could lead to further downward pressure on house price, pushing more households into negative equity. In this case mortgage arrears and defaults will rise, putting further pressure on the financial sector."

Professor Blanchflower also called for measures to tackle youth unemployment, saying: "It is particularly important to target the young because long spells of unemployment while young cause permanent scars rather than the temporary blemishes that occur for older workers who already have a foothold in the labour market."

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