Suchergebnisse

The US current account imbalance has stayed stubbornly high despite the fall in the dollar that we have seen since the beginning of 2003. The exchange rate has fallen by around 15 per cent on average, mainly between the first quarter of 2003 and the first quarter of 2005. As we can see from figure 1, the fall has come in three steps, and each time it fell we might have expected an initial worsening of the current account for a year or so as prices change in advance of quantities (the J curve effect of the first year textbook). Hence we might have expected no sustained improvement until at least a year after the last downward step towards the end of 2004. However, as we can see from figure 2, there is no noticeable improvement in the current account during 2006, suggesting that domestic absorption was rising. At the same time inflation in the US was gradually drifting up under pressure from the weakening exchange rate.

The Institute periodically reviews the accuracy of its macroeconomic forecasts. Pain et al. (2001) compare the performance of NIESR output forecasts to a naïve forecast that uses a simple rule to predict growth next year. They find that between 1980 and 2000 the National Institute forecast performed better than a naïve, or random walk, forecast in two years out of three. Poulizac et al. (1996) consider a sequence of quarterly economic forecasts published by NIESR between 1982 and 1995 (beginning with that produced in February for the growth of GDP and inflation in the following year and finishing with the forecast produced in November for growth in the current year). They show how the reliability of the Institute's forecast improves as the forecast horizon approaches and conclude that errors to GDP and inflation forecasts are normally distributed. In a similar vein, Mitchell (2005) shows that the Institute's point forecast of inflation is reliable whilst its measure of uncertainty has been exaggerated.

In the 15 years to 2000 UK business investment rose quite substantially in real terms. Having shown little deviation from an average of 7¼ per cent over the period 1965–85, the real share of business investment in GDP measured 10¾ per cent in 2000 (see figure 1). One of the factors contributing to this increase was the sharp fall in the relative price of investment goods, the scale of which is illustrated by the altogether different trends in real and nominal shares of business investment in GDP.

Government expenditure has been rising rapidly as a proportion of GDP in recent years, and has risen from 39.5 per cent in 2002 to 40.9 per cent in 2003 and 2004 and is anticipated to rise to 41.5 per cent in 2005. Around two thirds of this increase in spending is projected to be on current consumption, whilst one third is on net investment. Between the first and the last of these fiscal years we project that the government deficit, as defined by Public Sector Net Borrowing, will have also increased by 1 per cent of GDP. During that period we expect that the output gap will have closed, and hence the deterioration in the public finances must be seen as a consequence of the policy actions of the Government and not as a result of the economic cycle. These policy actions will have contributed to the current unbalanced state of the economy, where we have strong growth and high government borrowing along with a poor and deteriorating current account.

Economic growth has been disappointing in the first half of 2003. The economy expanded by 0.1 per cent in the first quarter. Based on our monthly estimates of GDP we estimate that economic growth accelerated to around 0.4 per cent in the second quarter, remaining below trend. The weakness in the first quarter of the year came as a result of little growth in household consumption expenditure at a time when the corporate sector remained weak. We expect this pattern to have continued in the second quarter, although our forecast for growth in household consumption expenditure is not as weak as recorded at the beginning of the year. Our forecast of quarterly GDP growth (chart 1) shows the economy expanding more rapidly in the second half of the year. Growth in the second half of the year is supported by government investment and consumption expenditure, and a gradual recovery of growth in export volumes and business investment. Growth in export volumes is helped by the depreciation of the sterling effective exchange rate in the first half of this year, although there has been some rebound in the index over the summer. Conditions for business investment have also improved. Equity prices have risen in the second quarter of the year, monetary policy has been eased and the increase in geopolitical uncertainty that probably dampened investment in the first half of the year has subsided.

Fiscal pacts and automatic stabilisers are widely discussed in the policy debate. Pacts put bounds on borrowing, and the bounds have to be evaluated. We use our model, NiGEM, to set safe targets for European deficits. Although there are many issues to consider, we conclude that cyclically adjusted target deficits of 1 per cent of GDP would ensure that governments seldom had to borrow more than 3 per cent of GDP, especially if they stood ready to raise taxes when the deficit deteriorated either for reasons separate from cyclical developments or because supply shocks had occurred. Offsetting the automatic stabilisers when supply shocks occur is shown to help stabilise output volatility.

In this paper we investigate whether differences we observe in European labour market transmission mechanisms matter for monetary policy design. We are particularly concerned with the robustness of the choice of rule by the European Central Bank (ECB) but we also comment on the choice of rules in the UK. Three different models of labour markets are constructed, one where the relationships are estimated separately, one where the most statistically acceptable commonalities across countries are imposed and one where common relationships are imposed across all countries. Panel estimation techniques are used to test for commonalities. These models are embedded into the National Institute's Global Econometric Model, NiGEM, and stochastic simulations are run to evaluate different monetary policy rules.

The policy regime in Europe has put the economy on 'auto-pilot'. We investigate different designs for the required feedback mechanisms. The uncertainty facing an economy depends on the pattern of shocks it faces, the response of the private sector to those shocks and also the policy reactions of the authorities. Two 'ideal type' policy regimes are investigated, and inflation targeting is compared to nominal aggregate targeting. In general it is suggested that targeting a nominal aggregate reduces the variability of the price level, and stabilises the price level more quickly over time. Inflation outcomes are also less variable for the Euro Area, and they are less asymmetric when a nominal aggregate is targeted. The new European fiscal framework requires that countries set deficit targets close to balance. We show that there is plenty of space for automatic stabilisers to work, but the room available depends in part on the monetary policy framework chosen.

There are new monetary and fiscal frameworks in place for the countries in the Euro Area. The European Central Bank has a remit to maintain price level stability in the medium term, and it has developed a two pillar strategy, with interest rates being set in relation to a reference value of M3 and general (inflationary) conditions. We discuss an ideal type representation of this framework and examine the potential effects of a fall in the euro. Fiscal policy in Europe is now based on guidelines from the Stability and Growth Pact and we discuss the role of commitment in this framework as well