Suchergebnisse

The new government will inherit an unhealthy fiscal position, with public sector borrowing higher than would normally be expected at this stage of the economic cycle. Chart 1 shows the public sector financial deficit as a proportion of GDP when compared with an estimate of the cyclically adjusted deficit. This shows for each date an estimate of what the deficit would have been if the economy had been operating at full capacity, as in early 1973 and late 1988, and achieved a level of output higher than has been normal over the past twenty five years.(1) In cyclically adjusted terms, the budget was in surplus throughout the 1980s but went strongly into deficit around the time of the 1992 election. Since this also coincided with the recession, the actual budget deficit deteriorated sharply around this time, reaching a peak at the beginning of 1994. Since then there has been a decline in both the actual and the cyclically adjusted deficit.

Economic forecasts are usually presented as point estimates, despite the margin of uncertainty which surrounds them. In November 1995 the National Institute began to present estimates of the probability of the government's inflation target being met and of there being a fall in GDP. This article describes the methods that we use for calculating these probabilities. We show, by studying eight successive forecasts of the same event, how forecast reliability improves as the forecast horizon approaches and demonstrate that this can be explained in terms of the accumulation of information about the state of the economy.

In this article we propose a policy framework for inflation targeting that contains elements of both optimal and simple rules. We use a simple feedback rule for the interest rate to look after monetary policy in the long run whilst using optimal control in the short run to determine appropriate responses to shocks. The composite policy is capable of substantial welfare improvements over using a simple rule alone whilst maintaining tractability. We see the use of such a framework together with a fully specified model as a feasible approach to practical policy design.

Abstract
Firms' expectations play a central role in modern macroeconomic models, but little is known empirically about them. Using panel data on manufacturing firms' expectations about prices and wage rates, new orders, employment and unit costs for the United Kingdom, we document a range of stylised facts about firms' expectations and their determinants. There is wide dispersion of expectations across firms. Firms' expectations are influenced by both firm-specific factors and macroeconomic factors. We find a significant connection between past expected price and wage increases and their out-turns. Firms' expectations are, however, clearly not rational.

The Pensions Commission is to make its recommendations on pension policy reform later this year, in the light of comments on the challenges identified in its first Report. Widespread agreement on the need for such reform is partly a consequence of problems which have already surfaced, such as the insolvency of some pension schemes, moves to curtail benefits and mis-selling scandals. However the main impetus comes from the fact, clearly demonstrated by the Pensions Commission (2004), that for pensioners to enjoy the current relative standard of living in fifty years time will require people either to (i) retire later (ii) save more; or (iii) pay higher taxes. In the Commission's view the key issues are to find a consensus on the appropriate combination of these three, or of the alternative of lower pensioner incomes, and to find ways of bringing about such an outcome. We focus on aspects of such a reform and suggest one measure which could be implemented without further ado.

When the Labour Party came to power in 1997, it had an agenda for reforming the functioning of the UK economy. It planned to introduce a stability-oriented macroeconomic policy that would enhance growth. It was critical of the high level of borrowing that the previous Government had undertaken, and promised to be more prudent. It wanted to increase participation and employment in the economy as a means of both increasing output and reducing poverty. It also aimed to improve the quality of the labour force by enhancing the educational standard of the population and to close the productivity gap between Britain and other European countries.

The production of this forecast is supported by the Institute's Corporate Members: Abbey plc, Bank of England, Barclays Bank plc, Ernst and Young LLP, GlaxoSmithKline plc, Marks and Spencer plc, Morgan Stanley Dean Witter (Europe) Ltd, Morley Fund Management, The National Grid Company plc, Nomura Research Institute Europe Ltd, Rio Tinto plc, Standard Chartered Bank plc, Unilever plc and Watson Wyatt LLP.

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.