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- 1. Fiscal andFiscal and MonetaryPolicyMonetary Policy
- 2. Fiscal and MonetaryPolicy The Nature of Fiscal Policy
- 3. THE NATURE OFFISCAL POLICY The purpose of fiscal policy correcting a fundamental disequilibrium fine tuning Government finances budget deficits and surpluses financing a deficit the PSNCR
- 4. UK public-sector deficits/surpluses:1979–2001UK public-sector deficits/surpluses: 1979–2001
- 5. UK public-sector deficits/surpluses:1979–2001UK public-sector deficits/surpluses: 1979–2001
- 6. UK public-sector deficits/surpluses:1979–2001UK public-sector deficits/surpluses: 1979–2001
- 7. UK public-sector deficits/surpluses:1979–2001UK public-sector deficits/surpluses: 1979–2001
- 8. Annualgrowthrate(%)UK general governmentexpenditure as % of GDP 34 36 38 40 42 44 46 48 50 1970 1975 1980 1985 1990 1995 2000
- 9. Annualgrowthrate(%)UK general governmentexpenditure as % of GDP 34 36 38 40 42 44 46 48 50 1970 1975 1980 1985 1990 1995 2000
- 10. H General publicservices 4.4% I Housing, etc 3.6% J Recreation, etc 1.7% K Environment 0.9% 1991 1999 UK general government expenditure by function (%) H General public services 5.1% I Housing, etc 1.5% J Recreation, etc 1.0% K Environment 0.7%
- 11. H General publicservices 4.4% I Housing, etc 3.6% J Recreation, etc 1.7% K Environment 0.9% 1991 1999 UK general government expenditure by function (%) H General public services 5.1% I Housing, etc 1.5% J Recreation, etc 1.0% K Environment 0.7%
- 12. General government deficits/surplusesGeneralgovernment deficits/surpluses and debt as % of GDPand debt as % of GDP
- 13. General government deficits/surplusesGeneralgovernment deficits/surpluses and debt as % of GDPand debt as % of GDP
- 14. THE NATURE OFFISCAL POLICY The purpose of fiscal policy correcting a fundamental disequilibrium fine tuning Government finances budget deficits and surpluses financing a deficit the PSNCR the national debt and public-sector debt
- 15. Getting budget deficitsdown? -3 -1 1 3 5 7 9 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Budgetdeficitsasa%ofGDP
- 16. France -3 -1 1 3 5 7 9 1992 1993 19941995 1996 1997 1998 1999 2000 2001 Budgetdeficitsasa%ofGDP Getting budget deficits down?
- 17. FranceGermany -3 -1 1 3 5 7 9 1992 1993 19941995 1996 1997 1998 1999 2000 2001 Budgetdeficitsasa%ofGDP Getting budget deficits down?
- 18. FranceGermany Italy -3 -1 1 3 5 7 9 1992 1993 19941995 1996 1997 1998 1999 2000 2001 Budgetdeficitsasa%ofGDP Getting budget deficits down?
- 19. Spain FranceGermany Italy -3 -1 1 3 5 7 9 1992 1993 19941995 1996 1997 1998 1999 2000 2001 Budgetdeficitsasa%ofGDP Getting budget deficits down?
- 20. Spain FranceGermany Italy Belgium -3 -1 1 3 5 7 9 1992 1993 19941995 1996 1997 1998 1999 2000 2001 Budgetdeficitsasa%ofGDP Getting budget deficits down?
- 21. Spain FranceGermany Italy Netherlands Belgium -3 -1 1 3 5 7 9 1992 1993 19941995 1996 1997 1998 1999 2000 2001 Budgetdeficitsasa%ofGDP Getting budget deficits down?
- 22. 30 35 40 45 50 55 60 65 70 75 80 1982 1984 19861988 1990 1992 1994 1996 1998 2000 National Debt (as % of GDP) National Debt
- 23. 30 35 40 45 50 55 60 65 70 75 80 1982 1984 19861988 1990 1992 1994 1996 1998 2000 National Debt (as % of GDP) National Debt UK
- 24. 30 35 40 45 50 55 60 65 70 75 80 1982 1984 19861988 1990 1992 1994 1996 1998 2000 USA National Debt (as % of GDP) National Debt UK
- 25. 30 35 40 45 50 55 60 65 70 75 80 1982 1984 19861988 1990 1992 1994 1996 1998 2000 Euro area USA UK National Debt (as % of GDP) National Debt
- 26. THE NATURE OFFISCAL POLICY Public-sector deficits or surpluses and the government’s fiscal stance fiscal stance and the state of the economy the structural balance Automatic fiscal stabilisers tax stabilisers benefits stabilisers
- 27. O G, T Y Tax revenue Gov.expenditure (incl. benefits) Y1 DEFICIT SURPLUS National income and the size of the public-sector deficit or surplus
- 28. THE NATURE OFFISCAL POLICY Public-sector deficits or surpluses and the government’s fiscal stance fiscal stance and the state of the economy the structural balance Automatic fiscal stabilisers tax stabilisers benefits stabilisers Discretionary fiscal policy
- 29. THE NATURE OFFISCAL POLICY Public-sector deficits or surpluses and the government’s fiscal stance fiscal stance and the state of the economy the structural balance Automatic fiscal stabilisers tax stabilisers benefits stabilisers Discretionary fiscal policy changing government expenditure
- 30. THE NATURE OFFISCAL POLICY Public-sector deficits or surpluses and the government’s fiscal stance fiscal stance and the state of the economy the structural balance Automatic fiscal stabilisers tax stabilisers benefits stabilisers Discretionary fiscal policy changing government expenditure changing taxes
- 31. A cut intaxes: (a) lump-sum taxes O W, J Y W1
- 32. O W, J Y W1 W2 A cutin taxes: (a) lump-sum taxes
- 33. O W, J Y W1 W2 ∆T xmpcd A cut in taxes: (a) lump-sum taxes
- 34. A cut intaxes: (b) cut in tax rates O W, J Y W1
- 35. O W, J Y W1 W2 A cutin taxes: (b) cut in tax rates
- 36. O W, J Y W1 W2 ∆T xmpcd A cut in taxes: (b) cut in tax rates
- 37. Fiscal and MonetaryPolicy The Effectiveness of Fiscal Policy
- 38. EFFECTIVENESS OF FISCALPOLICY Effectiveness of automatic stabilisers adverse supply-side effects the problem of fiscal drag Discretionary policy: problems of forecasting the magnitude of the effect effects on other injections and withdrawals crowding out
- 39. O W, J Y (a) Thegoods market(a) The goods market W J1 Y1 The monetary effects of fiscal policy
- 40. O O W, J Rateof interest Y Money (a) The goods market(a) The goods market (b) The money market(b) The money market W J1 Y1 MS L1 r1 The monetary effects of fiscal policy
- 41. O O W, J Rateof interest Y Money (a) The goods market(a) The goods market (b) The money market(b) The money market W J1 Y1 MS L1 r1 Y2 J2 An expansionary fiscal policy The monetary effects of fiscal policy
- 42. O O W, J Rateof interest Y Money (a) The goods market(a) The goods market (b) The money market(b) The money market W J1 Y1 MS L1 r1 Y2 J2 An expansionary fiscal policy L2 r2 Effect on the demand for money The monetary effects of fiscal policy
- 43. O O W, J Rateof interest Y Money (a) The goods market(a) The goods market (b) The money market(b) The money market W J1 Y1 MS L1 r1 Y2 J2 An expansionary fiscal policy L2 Accommodating increase in the money supply MS2 r2 The monetary effects of fiscal policy
- 44. EFFECTIVENESS OF FISCALPOLICY Effectiveness of automatic stabilisers adverse supply-side effects the problem of fiscal drag Discretionary policy: problems of forecasting the magnitude of the effect effects on other injections and withdrawals crowding out size of the multiplier and accelerator effects
- 45. EFFECTIVENESS OF FISCALPOLICY Discretionary fiscal policy: problems of timing and time lags various time lags policy may be destabilising
- 46. Fiscal policy: stabilisingor destabilising? O Realnationalincome Time 1 2 3 4 1 2 3 4 Path (a): no intervention
- 47. O Realnationalincome Time 1 2 3 4 1 2 3 4 Path (a): nointervention Path (b): policy stabilises Fiscal policy: stabilising or destabilising?
- 48. O Realnationalincome Time 1 2 3 4 1 2 3 4 Path (a): nointervention Path (c): policy destabilises Path (b): policy stabilises Fiscal policy: stabilising or destabilising?
- 49. EFFECTIVENESS OF FISCALPOLICY Discretionary fiscal policy: problems of timing and time lags various time lags policy may be destabilising Side-effects of discretionary fiscal policy
- 50. EFFECTIVENESS OF FISCALPOLICY Discretionary fiscal policy: problems of timing and time lags various time lags policy may be destabilising Side-effects of discretionary fiscal policy Changing government expenditure versus changing taxes
- 51. Fiscal and MonetaryPolicy Varieties of Monetary Policy
- 52. VARIETIES OF MONETARYPOLICY The policy setting historical approaches to monetary policy current approach to monetary policy Control of money supply over medium and long term control of banks’ liquidity ratio restricting size of PSNCR Short-term monetary control: the alternatives
- 53. The demand forand supply of money O Money Rateofinterest MS L r1 Q1
- 54. O Money Rateofinterest L r1 Q1 r2 Q2 MS' The demand forand supply of money MS
- 55. VARIETIES OF MONETARYPOLICY Techniques to control money supply preliminary decisions: statutory or prudent ratios? what to control: monetary base or broad money? open-market operations funding variable minimum reserve ratios
- 56. Effect of raisingthe minimum reserve ratio from 10% to 20% Initial position: 10% reserve ratio
- 57. Effect of raisingthe minimum reserve ratio from 10% to 20% Initial position: 10% reserve ratio New position: 20% reserve ratio
- 58. VARIETIES OF MONETARYPOLICY Techniques to control money supply preliminary decisions: statutory or prudent ratios? what to control: monetary base or broad money? open-market operations funding variable minimum reserve ratios Techniques to control interest rates
- 59. VARIETIES OF MONETARYPOLICY Techniques to control money supply preliminary decisions: statutory or prudent ratios? what to control: monetary base or broad money? open-market operations funding variable minimum reserve ratios Techniques to control interest rates statutory base rates
- 60. VARIETIES OF MONETARYPOLICY Techniques to control money supply preliminary decisions: statutory or prudent ratios? what to control: monetary base or broad money? open-market operations funding variable minimum reserve ratios Techniques to control interest rates statutory base rates operations in discount and repo markets
- 61. Bank of Englandoperations in the bill and gilt repo markets to raise interest rates O (a) Bank of England sells more bills Rateofdiscount Bills S1 by B. of E. r1 D by banks
- 62. r2 Bank of Englandoperations in the bill and gilt repo markets to raise interest rates O Rateofdiscount Bills S1 by B. of E. S2 by B. of E. D by banks r1 (a) Bank of England sells more bills
- 63. S by banks Bankof England operations in the bill and gilt repo markets to raise interest rates O (b) Bank of England buys fewer bills / Rateofdiscount/giltreporate Bills and gilts D1 by B. of E. r1
- 64. Bank of Englandoperations in the bill and gilt repo markets to raise interest rates O Rateofdiscount/giltreporate Bills and gilts D1 by B. of E. r1 D2 by B. of E. r2 S by banks (b) Bank of England buys fewer bills /
- 65. VARIETIES OF MONETARYPOLICY Techniques to control money supply preliminary decisions: statutory or prudent ratios? what to control: monetary base or broad money? open-market operations funding variable minimum reserve ratios Techniques to control interest rates statutory base rates operations in discount and repo markets Credit rationing
- 66. Fiscal and MonetaryPolicy Problems of Monetary Policy
- 67. PROBLEMS OF MONETARYPOLICY Medium and long-term control over the money supply: reducing PSNCR automatic fiscal stabilisers the desire to cut taxes difficulty in cutting government expenditure
- 68. PROBLEMS OF MONETARYPOLICY Practical difficulties in short-run control of the money supply problems with monetary base control with statutory cash ratios without statutory cash ratios problems with controlling broad liquidity with statutory reserve ratios without statutory reserve ratios the effect on interest rates
- 69. O Money Rateofinterest MS L r L ' r1 The effecton interest rates of a change in demand for money: money supply kept at fixed level by the authorities
- 70. PROBLEMS OF MONETARYPOLICY Problems with credit rationing Goodhart's law bank resistance stifles competition distortionary effects on economy Problems with controlling interest rates inelastic demand for loans
- 71. O Demand for loans Q1Q2 Assumethat the authorities want to reduce the demand for money to Q2 r1 Loans Rateofinterest An inelastic demand for loans
- 72. r2 O Demand for loans r1 Q1Q2 Alarge rise in the rate of interest (to r2) will be necessary Loans Rateofinterest An inelastic demand for loans
- 73. PROBLEMS OF MONETARYPOLICY Problems with credit rationing Goodhart's law bank resistance stifles competition distortionary effects on economy Problems with controlling interest rates inelastic demand for loans unstable demand for money
- 74. PROBLEMS OF MONETARYPOLICY Problems with credit rationing Goodhart's law bank resistance stifles competition distortionary effects on economy Problems with controlling interest rates inelastic demand for loans unstable demand for money possible conflict between domestic goals and exchange-rate goals
- 75. PROBLEMS OF MONETARYPOLICY Using monetary policy problems of using it to manage aggregate demand using it to keep to a target inflation exchange rate money supply
- 76. Fiscal and MonetaryPolicy ISLM Analysis of Fiscal and Monetary Policy
- 77. Equilibrium in boththe goods and money markets O Rateofinterest National income IS re Ye LM
- 78. ISLM ANALYSIS OFFISCAL AND MONETARY POLICY Fiscal policy and ISLM analysis shifting the IS curve effect on interest rates and national income
- 79. O Rateofinterest National income LM IS r1 Y1 ISLM analysisof fiscal and monetary policy
- 80. O Rateofinterest National income IS1 r1 Y1 IS2 r2 Y2 Expansionary fiscal policy LM ISLManalysis of fiscal and monetary policy
- 81. Fiscal policy andISLM analysis shifting the IS curve effect on interest rates and national income Monetary policy and ISLM analysis shifting the LM curve effect on interest rates and national income ISLM ANALYSIS OF FISCAL AND MONETARY POLICY
- 82. O Rateofinterest National income LM1 IS r1 Y1 LM2 r3 Y3 Expansionary monetary policy ISLManalysis of fiscal and monetary policy
- 83. Fiscal policy andISLM analysis shifting the IS curve effect on interest rates and national income Monetary policy and ISLM analysis shifting the LM curve effect on interest rates and national income Fiscal and monetary policy together ISLM ANALYSIS OF FISCAL AND MONETARY POLICY
- 84. LM2 LM1 O Rateofinterest National income IS1 r1 Y1 IS2 Y4 Expansionary fiscal and monetarypolicy ISLM analysis of fiscal and monetary policy
- 85. Analysis under Keynesianassumptions effectiveness of fiscal policy ISLM ANALYSIS OF FISCAL AND MONETARY POLICY
- 86. O Rateofinterest National income LM IS1 Y1 IS2 Y2 Expansionary fiscal policy Keynesiananalysis of fiscal and monetary policy
- 87. Analysis under Keynesianassumptions effectiveness of fiscal policy ineffectiveness of monetary policy ISLM ANALYSIS OF FISCAL AND MONETARY POLICY
- 88. O Rateofinterest National income LM1 IS Y1Y2 Expansionary monetary policy LM2 Keynesiananalysis of fiscal and monetary policy
- 89. Analysis under Keynesianassumptions effectiveness of fiscal policy ineffectiveness of monetary policy Analysis under monetarist assumptions ISLM ANALYSIS OF FISCAL AND MONETARY POLICY
- 90. Analysis under Keynesianassumptions effectiveness of fiscal policy ineffectiveness of monetary policy Analysis under monetarist assumptions ineffectiveness of fiscal policy ISLM ANALYSIS OF FISCAL AND MONETARY POLICY
- 91. O Rateofinterest National income LM IS1 Y1Y2 Expansionary fiscal policy IS2 Monetaristanalysis of fiscal and monetary policy
- 92. Analysis under Keynesianassumptions effectiveness of fiscal policy ineffectiveness of monetary policy Analysis under monetarist assumptions ineffectiveness of fiscal policy effectiveness of monetary policy ISLM ANALYSIS OF FISCAL AND MONETARY POLICY
- 93. O Rateofinterest National income LM1 IS Y1 Y2 Expansionary monetarypolicy LM2 Monetarist analysis of fiscal and monetary policy
- 94. Fiscal and MonetaryPolicy Fiscal and Monetary Policy in the UK
- 95. Growth % -10 -5 0 5 10 1920 1925 19301935 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 -10 -5 0 5 10 15 20 25 30 UK growth, unemployment and inflation: 1920−2002
- 96. Growth % -10 -5 0 5 10 1920 1925 19301935 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 -10 -5 0 5 10 15 20 25 30 UK growth, unemployment and inflation: 1920−2002
- 97. Growth Unemployment % % -10 -5 0 5 10 1920 19251930 1935 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 -10 -5 0 5 10 15 20 25 30 UK growth, unemployment and inflation: 1920−2002
- 98. Growth Unemployment Inflation % % -10 -5 0 5 10 1920 19251930 1935 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 -10 -5 0 5 10 15 20 25 30 UK growth, unemployment and inflation: 1920−2002
- 99. UK Macroeconomic performance:1921 – 99UK Macroeconomic performance: 1921 – 99UK Macroeconomic performance: 1921 – 99UK Macroeconomic performance: 1921 – 99
- 100. UK Macroeconomic performance:1921 – 99UK Macroeconomic performance: 1921 – 99UK Macroeconomic performance: 1921 – 99UK Macroeconomic performance: 1921 – 99
- 101. UK Macroeconomic performance:1921 – 99UK Macroeconomic performance: 1921 – 99UK Macroeconomic performance: 1921 – 99UK Macroeconomic performance: 1921 – 99
- 102. FISCAL AND MONETARYPOLICY IN THE UK Attitudes towards demand management Keynesian demand management in the 1950s and 1960s stop–go policies monetarist criticisms Demise of fine tuning in the 1970s the causes of stagflation demand management policies in the 1970s the rise of monetarism
- 103. Selected monetary indicators:1969–2001
- 104. Monetarism in theearly 1980s medium-term financial strategy the recession of the early 1980s assessment of the monetarist experiment return to discretion in mid 1980s Targeting the exchange rate its advantages and disadvantages shadowing the German mark membership of the ERM (1990–2) exit from the ERM FISCAL AND MONETARY POLICY IN THE UK
- 105. Return to domestic-orientatedpolicies targeting inflation: 1993–7 Policies of the Labour government 1997 fiscal policy the 'Golden Rule' Comparison with EU Stability and Growth Pact monetary policy Bank of England inflation target ECB targets effectiveness of recent monetary and fiscal policies FISCAL AND MONETARY POLICY IN THE UK
- 106. Fiscal and MonetaryPolicy Rules versus Discretion
- 107. RULES VERSUS DISCRETION Caseagainst discretion time lags over-correction government may ignore long-term consequences Case for rules help to reduce inflationary expectations create a stable environment for investment and economic growth
- 108. RULES VERSUS DISCRETION Caseagainst rules can cause severe fluctuations in interest rates and can cause greater instability which rule to choose? rules may conflict rules may become unsuitable Case for discretion fine tuning can be improved by better forecasting and quicker-action
- 109. RULES VERSUS DISCRETION Inflationtargeting use of inflation targets around the world
- 110. Source: The Useof Explicit Targets for Monetary Policy: Practical Experiences of 91 economies in the 1990s, (Bank of England, August 1999) Who sets explicit targets and monitoring ranges for the exchange rate, money and inflation
- 111. Source: The Useof Explicit Targets for Monetary Policy: Practical Experiences of 91 economies in the 1990s, (Bank of England, August 1999) Who sets explicit targets and monitoring ranges for the exchange rate, money and inflation
- 112. Source: The Useof Explicit Targets for Monetary Policy: Practical Experiences of 91 economies in the 1990s, (Bank of England, August 1999) Who sets explicit targets and monitoring ranges for the exchange rate, money and inflation
- 113. Source: The Useof Explicit Targets for Monetary Policy: Practical Experiences of 91 economies in the 1990s, (Bank of England, August 1999) Who sets explicit targets and monitoring ranges for the exchange rate, money and inflation
- 114. Source: Bank ofEngland
- 115. RULES VERSUS DISCRETION Inflationtargeting use of inflation targets around the world weaknesses of money supply targets
- 116. RULES VERSUS DISCRETION Inflationtargeting use of inflation targets around the world weaknesses of money supply targets weaknesses of exchange rate targets
- 117. RULES VERSUS DISCRETION Inflationtargeting use of inflation targets around the world weaknesses of money supply targets weaknesses of exchange rate targets relative strength of inflation targets
- 118. RULES VERSUS DISCRETION Inflationtargeting use of inflation targets around the world weaknesses of money supply targets weaknesses of exchange rate targets relative strength of inflation targets Issues with inflation targets
- 119. RULES VERSUS DISCRETION Inflationtargeting use of inflation targets around the world weaknesses of money supply targets weaknesses of exchange rate targets relative strength of inflation targets Issues with inflation targets choice of the target what level? central point or ceiling?
- 120. RULES VERSUS DISCRETION Issueswith inflation targets (cont.) who sets the target? changing the target multiple targets a Taylor rule for setting interest rates
- 121. Y0 O National income ADI1 Rateofinflation(P) . Ptarget . ADI curvesbased on different Taylor rules a Y1 Curve ADI1: based on Taylor rule giving relatively high weight to stable inflation P1 . b
- 122. ADI2 Y0 O National income ADI1 Rateofinflation(P) . Ptarget . a Y2Y1 bc Curve ADI1: based on Taylor rule giving relatively high weight to stable inflation Curve ADI2: based on Taylor rule giving relatively high weight to stable real national income P1 . ADI curves based on different Taylor rules
- 123. RULES VERSUS DISCRETION Issueswith inflation targets (cont.) who sets the target? changing the target multiple targets a Taylor rule for setting interest rates targeting inflation and the money supply
- 124. RULES VERSUS DISCRETION Issueswith inflation targets (cont.) who sets the target? changing the target multiple targets a Taylor rule for setting interest rates targeting inflation and the money supply basing interest rates on forecasts of inflation
- 125. RULES VERSUS DISCRETION Issueswith inflation targets (cont.) who sets the target? changing the target multiple targets a Taylor rule for setting interest rates targeting inflation and the money supply basing interest rates on forecasts of inflation the problem of deflation
Editor's Notes
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