Ec 111 week 5 b
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  • 1. EC-111 British EconomyRecent UK MacroeconomicTrendsDr Catherine RobinsonF26, Richard Price BuildingOffice Hours: Mondays 10.30-11.30 and Thursdays 9.30-10.30Appointments:
  • 2. So, the UK policy response•To emphasise international co-operation and co-ordinatedfiscal and monetary policy responses to help move the UKand world economies out of recession•a number of levers during the recession:Bank base rate reduced to 0.5 per centBailing out of some banks and finance to support the balancesheets of the banksValue Added Tax temporarily reduced from 17.5% to 15%Quantitative easing of £200billion – Asset Purchase Facility bywhich the Bank of England can buy corporate bondsCar scrappage schemeWeek 5:12
  • 3. Into 2009…heading intodouble dip… But the market is still jittery (Flash crash of the NYSE in May2010) International organisations meeting to define standards inbanking (BASEL I – 1980s and non-binding) To raise capital ratios, to improve stability in internationalbanking and to reduce regulatory differences globally BASEL III (September 2010) Increased the capital ratio requirements Insisted on new capital buffers Banks argued that there was a risk of a double dip as a result Banks consolidated and tried to diversify – also M&AWeek 5:13
  • 4. And the currency markets?? Contagion means that currencies are suffering Euro problems in Ireland, Greece and now Portugal andItaly… Cyprus problems in the news recently A country that was developing via two sectors – tourism andoff shore bankingWeek 5:14
  • 5. How can we ensure this mistakedoesn’t happen again? Regulate the financial sector more effectively Commission a report – the Independent Commission on Banking Sir John Vickers Report published in September 2011 recommendations on ring-fencing domestic retail banking, 1/6th to1/3rd of banking assets to be within the ring-fence Competition in banking sector needs to be improved “Future of Finance”, 2010 Report by LSE stars – Adair Turner, Andy Haldane and lots ofothers Highlights that central banks and governments should shouldersome of the responsibility for the failure – argue as yet, this hasn’thappenedWeek 5:15
  • 6. Financial Services Act2012 Came into effect on 1stApril, 2013 Brings Bank, FSA and treasuryunder the same umbrella Criticised in the past for littlecoordination between theinstitutionsWeek 5:16
  • 7. Management of the financialsystem Increasingly understood that the financial system hadchanged beyond recognition from the 1980s Many banking investments were obscured, borderingon illegal (Barclays fined £500m by the UK treasury) Libor scandal extended beyond Barclays in the endWeek 5:17
  • 8. Why are banks regulated in thefirst place? Goodhart (2010) Market failures: Monopoly control Asymmetric information Externalities (social costs to bankruptcies)Week 5:18
  • 9. What has happened to our macrovariables?Source: Gregg and Wadsworth(2010)Week 5:19
  • 10. International variations• Gregg and Wadsworth (2010) group countries into 5categories on the basis of changes in the GDP andunemployment over the recession: Those with small falls in employment relative to GDP (UKand Sweden) Those with small falls in employment relative toGDP, having introduced employment subsides(Italy, Germany, Netherlands and Japan) Those with similar employment and GDP falls (France) Those with larger employment falls than GDP (US, Spainand Ireland) Those with little fall in GDP (Australia)Week 5:110
  • 11. Why did the UK labour market holdup?Employers entered the recession in fairly good financial shapeAble to absorb some of the downturn without shedding jobs Total hours worked have fallen sharply and the share of part-timersrisen Workers accepted nominal wage moderation early on in therecessionincreased chances of finding work if they are made redundant• The impact on productivity (and international competitiveness) andpublic finances has been large; hence the cutsWeek 5:111
  • 12. Cost of crisis The level of debt in most Western Economies is adirect result of bank bailouts Severe recession Bank of England policy of “quantitative easing” Exchange rate system in Europe under threat Greece most obviously Irish IMF loan and the austerity measures Italy, Spain and Portugal also under pressureWeek 5:112
  • 13. Slide 30.13Griffiths and Wall, Applied Economics 12th Edition © Pearson Education Limited 2012CountryNationalDebt 2009NationalDebt 2014Budgetdeficit 2009Budgetsurplusrequired* in2014US 88.8 121.0 -12.3 4.3Japan 217.4 239.2 -9.0 9.8Germany 79.8 91.4 -2.3 2.8France 77.4 95.5 -5.3 3.1Britain 68.6 99.7 -10.0 3.4G20 100.6 119.7 -8.6 4.5*To bring respective national debts back to a maximum of 60% of GDP by 2014Source: IMF, World Economic Outlook (various)
  • 14. And now the Euro… Weaker countries within the Eurozone have suffered –especially Greece No longer considered to be a good debtor Agreed to a range of austerity measures for theforeseeable future in exchange for Euro bailout to preventnational bankruptcy A wider EU problem The ECB issued €530bn of cheap loans for Banks toease liquidity concernsWeek 5:114
  • 15. Failures of macro models? How come no one saw this coming? Well, some did (but not as many as now claim they did) Housing market had been overvalued for years in the UK Savings far too low Did our macroeconomic models let us down? Over-reliance on inflation targeting? Argued that MONEY is a glaring omission from existingnew Keynesian macro modelsWeek 5:115
  • 16. There will be othermistakes… Macroeconomic models will not cover all eventualities Abstractions from the real world Simplifications BUT still powerful tools A new focus on risk? The role of credit ratings are also under scrutinyWeek 5:116
  • 17. Road to recovery Osborne: Treat the recession Tighten the fiscal belt – balance the budget Reduce government spending – rebalance the UK economy Encourage growth through private sector enterprise and growingexports Regulatory reform of the financial sector Balancing the need for reform against the footloose nature of financialintermediaries Balls: Treat the depression Looser fiscal policy to encourage growth Short term increase in government spending to get the economy backon track Tougher stance on financial sector reformIs the second policy approach viable?Week 5:117
  • 18. References Griffiths and Wall (2012) Applied Economics, Chapter 21 for UK financialinstitutions, Chapter 30 for the basics Crafts and Fearon (2010) ‘Lessons from the 1930s Great Depression’, OxfordReview of Economic Policy, 26(3), 285-317 Drinkwater, Blackaby and Murphy (2011) ‘The Welsh Labour MarketFollowing the Great Recession’, WISERD Policy Brief A play by Julian Gough: goat futures explains the housing bubble For up to date information, have a look at the Economist blog: Deeper understanding in the current debates going on: Finance for the Future, LSE Report of 2010, available at This is really tough stuff though, so just read the summary!Week 5:118
  • 19. Review We have covered a lot 70 years in about 10 hours! What have we looked at? A bit of theory Macroeconomic variables Tinbergen’s model Flexible targetsKeynesinan versus monetarismInherent tradeoff between macro variables Post war macroeconomic performance in Britain was notbad, but could perhaps have been better What did post war Britain look like? Capital, labour,intermediates, employment, output, balance of paymentsWeek 5:119