§ Mr. Austin MitchellTo ask the Chancellor of the Exchequer if he will publish full details of the transmission mechanism through which increases in interest rates reduce the rate of inflation.
§ Mr. NelsonA change in interest rates is likely to affect the pressure of demand in the economy and hence inflation, through several different channels. It affects investment, stockbuilding and consumption directly by changing the cost of capital and the cost of borrowing. It also affects these expenditures indirectly by changing the incomes of borrowers and creditors and the value of assets, such as housing. It may also affect the inflation rate by changing the exchange rate and hence sterling 361W import prices. Some of these effects can be quick acting; others occur over a longer period.
Quantifying the aggregate effect is difficult. The estimates produced by the major United Kingdom macroeconomic models, including the published Treasury model, are regularly compared and published by the Economic and Social Research Council Macroeconomic Modelling Bureau at the University of Warwick. The latest comparison was published in the August 1993 "National Institute Economic Review," a copy of which is in the Library.