tag:blogger.com,1999:blog-2546602206734889307.post2330203999396433286..comments2024-03-28T04:29:22.717+00:00Comments on mainly macro: UK Deja Vu?Mainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-2546602206734889307.post-81318047613807960912012-01-18T12:49:17.555+00:002012-01-18T12:49:17.555+00:00I don't think the fact that unemployment remai...I don't think the fact that unemployment remained high in the 1980s is necessarily evidence of hysteresis. I think it's more likely that the natural rate was already increasing during the 1960s and 1970s, due to more generous benefits, the rise of the trade unions, declining educational standards, and increases in red tape. This increase was masked by nationalized industries (that would keep employing people for political reasons, e.g. coalminers) and by using fiscal and monetary policy to try and keep unemployment down. Remember, people believed in a stable Phillips curve then, thinking you could always keep unemployment down by accepting a bit more inflation. Ted Heath said something like, "unemployment is a greater social evil than inflation", clearly implying he thought there was a trade-off.<br /><br />In the 1980s, there was a swing to the other extreme, with fiscal and monetary policy focused on inflation. Also, the unproductive nationalized industries were broken up, which showed that the market-based natural rate was higher than it had appeared. I mean, you can achieve any level of unemployment you want in a socialist economy. As Britain became less socialist, it's natural that unemployment increased.<br /><br />I do think the experience of the 1981 budget had a strong influence on the present Tories. They did seem to think the situation was analogous, that 1981 had proved deficit-reduction to be the right response to recession (and that the recession was due to Labour overspending and encouraging debt) and that academic economists can be safely ignored. However, its worth noting that Mervin King endorsed the austerity program, and mainstream financial opinion seemed to agree with the coalition's policies.<br /><br />Also, it isn't obvious that the ZLB makes a big difference. The idea seems to be that with austerity, we can have more QE. Given that inflation has been way above target for the past couple of years, I'm not sure that the BoE could avoid raising rates in the face of fiscal stimulus.econojonhttps://www.blogger.com/profile/11836028530972814027noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-40383888590789381502012-01-18T12:35:57.679+00:002012-01-18T12:35:57.679+00:00Why are the periods so different?
The Bank of Eng...Why are the periods so different?<br /><br />The Bank of England think they are still able to boost demand in with tools of monetary policy - specifically, they can use QE which will boost nominal spending. They refrained from boosting demand through most of 2010 and 2011 because they have been concerned:<br /><br />a) that the ONS was significantly underestimating GDP growth, and<br />b) that there was little or no supply capacity in the UK economy.<br /><br />In other words, they were worried that more demand would only be inflationary, not higher output. Indeed, they were so worried about supply capacity in early 2011 that they came close to raising interest rates to *slow down* demand growth.<br /><br />What (New) Keynesians have been unwilling to address is the fact that we are so obviously witnessing a failure of (flexible) inflation targeting - or at least, a failure of the practice of flexible inflation targeting in the UK.<br /><br />The inflation rate is *obviously* a bad proxy for demand at the moment; we have high inflation despite deficient demand.<br /><br />It is entirely unconvincing to hear talk of fiscal stimulus in this light, whilst pretending that monetary policy makers will sit idle and "do nothing". <br /><br />If the MPC say we are at (or close to) supply capacity, the government *knows* it cannot stimulate demand further because the MPC will "push back". <br /><br />If the government think the MPC's estimate of supply capacity is wrong, why don't they replace the MPC or change the monetary policy mandate?<br /><br />If the government thinks that QE is unable to boost demand, why do they keep approving its use?<br /><br />Why are you not talking about the Riksbank's apparently surprising behaviour in leaving a liquidity trap, with the Swedish government providing less than 1% of GDP in deficit spending? Yet the UK government runs deficits of 10%, 9%, 8%, and still we are stuck at 0%?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-32817440261105952852012-01-17T23:07:09.151+00:002012-01-17T23:07:09.151+00:00This comment has been removed by the author.Carvapaihttps://www.blogger.com/profile/18066643678044979412noreply@blogger.com