The choice of Mr Wadhwani, who formerly worked for Goldman Sachs and lectured at the London School of Economics for eight years, is a clear signal that the Chancellor wants to keep the MPC a body of experts rather than one representative of industry. The MPC has been attacked by unions and business organisations for paying too little heed to the needs of industry.
Bank and Treasury insiders say Sir Alan has been one of the MPC's most important and influential members. He is regarded as one of the committee's interest-rate hawks, but the views of his successor are difficult to predict.
Sir Alan is stepping down from the MPC because of his appointment as Provost of Queen's College, Oxford. He had been due to retire from the Treasury, where he was chief economic adviser, when the Chancellor asked him to join the committee at a formative stage.
Economists will welcome the choice of an esteemed researcher as his successor. Mr Wadhwani specialised in analysing wage inflation and the jobs market before his move to the City. "He understands financial markets and the labour market. He is a well-rounded economist," said David Miles, professor of economics at Imperial College.
Chancellor Gordon Brown said: "He will bring not only recognised expertise in the field of labour market economics, but also considerable experience of the financial markets."
Mr Wadhwani has co-authored research papers with Mervyn King, now the Bank's deputy governor, and also with Lawrence Summers, the US Deputy Treasury Secretary.
In his most recent paper, Mr Wadhwani argued that US stocks were at least 20 per cent overvalued. The gloomy assessment caused a stir when it was published earlier this year.
Mr Wadhwani has resigned as director of research at Tudor Proprietary Trading, a hedge fund, and will move to the Bank on 1 June. Ian Plenderleith, one of the Bank's executive directors, is being reappointed to the MPC, it was also announced yesterday.