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3 December 2012
Does the decision to repatriate QE proceeds to the Treasury actually matter?
This week’s Inflation Report press conference was dominated by questions about the decision to repatriate proceeds from APF gilt purchases to the Treasury. Both the Bank and Treasury have passed it off as simply being good cash management, with relatively few implications for the economy. In contrast, a number of commentators have been highly critical, suggesting that it further blurs the line between fiscal and monetary policy and reflects a cynical attempt to make it easier for the Chancellor to achieve his borrowing targets. These arguments seem to hold little water; the changes do not obviously weaken the MPC’s control over monetary policy and could easily make it harder for the Chancellor to comply with his fiscal mandate.
16 November 2012
Have the advanced economies suffered a permanent loss of output?
The concept of the output gap, i.e. how much spare capacity there is in the economy, has taken on increasing importance in recent years with many governments adopting cyclically adjusted targets for fiscal policy. In many of the advanced economies GDP levels remain well below their pre-crisis peaks. Were we to assume that potential output has continued to grow at historic rates in the past five years, this would suggest double-digit output gaps across a number of countries. However, as commentators analyse the causes of the financial crisis and its implications, some have concluded that it has inflicted structural damage to potential output which will never be reclaimed, implying much smaller output gaps. We find that most countries have seen a permanent loss of potential output over the past five years, albeit to widely varying degrees. The largest losses will have come in countries which have experienced at least one of two factors – a systemic banking crisis or a sovereign debt crisis. By 2011 we estimate that potential output in the US and UK had fallen around 7% below where it would have been had the pre-crisis trend continued. In the case of the UK, this estimate is smaller than that of the OBR. As such, we argue that there is a larger output gap and that there is more scope for the public finances to improve as the economy recovers. Therefore, fiscal policy may have been tightened by more than was necessary.
19 October 2012