Abstracts » Business

Interest rates beyond our Ken

Article Abstract:

The UK government is trying to restore monetary credibility following the humiliating devaluation of the pound sterling and its subsequent expulsion from the Europe's Exchange Rate Mechanism by setting a stringent inflation target. To further placate the financial markets, it has given the Bank of England partial responsibility for achieving the inflation target, which is maintaining a 1% to 4% range for headline inflation minus mortgage interest. Central bank governor Eddie George and Chancellor of the Exchequer Kenneth Clarke initially agreed on the strategies to be used for meeting the target, but they recently had a major disagreement. George is convinced that further monetary tightening is necessary to bring monetary policy in line with the government's inflation target. Clarke, however, is opposed to this move and argues that the labor market and supply side reforms are enabling businesses to manage their capacity more efficiently.

Administration of General Economic Programs, Currency Stabilization Programs, Analysis, Management, Inflation (Finance), Monetary policy, Currency stabilization, Inflation (Economics)

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Economic trends: Mrs. T's taxing logic

Article Abstract:

British government strategy includes reducing the size of the Public Sector Borrowing Requirement (PSBR) and major tax cuts; however, the two objectives are incompatible and are causing financial difficulties. Reducing the PSBR has become the government's main objective, although the PSBR has little connection to interest rates or inflation. The PSBR should be viewed in relation to 'the non-accelerating inflation rate of unemployment'. A PSBR that is cyclically adjusted is probably needed to adjust for the effects of recession and inflation. Government borrowing seems to be under control, but total taxes collected on average earnings have increased. The favorable effects of government-reduced borrowing have not yet materialized in the United Kingdom's economy, despite the fact that inflation is falling sharply.

Government spending policy, Taxation, Great Britain

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Is it a recession or a 1930s-style slump?

Article Abstract:

The length and severity of the current recession in the UK makes it similar to the economic slump experienced by the country in the 1930s. Like the 1930s slump, the recession that started in 1990 is also characterized by a high level of indebtedness and high interest rates. The similarities are alarming, and unless dramatic changes in UK's economic policy are instituted, sustained recovery cannot be achieved. The only logical solution to the 1990s recession, as it was to the 1930s slump, is the devaluation of the sterling to a more appropriate ERM level. Such a devaluation will improve UK's competitiveness and address the balance of payments constraint encountered by any economic recovery. However, the devaluation option has always been ruled out by UK's politicians.

Recessions

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