Transcript Fiscal and Macroeconomic Policy

The Importance of
Macroeconomic Frameworks for
Economic Stability
Dave Ramsden
11 January 2006
Why does stability matter?
Higher living standards
Higher economic growth via





Better resource allocation
Decisions taken for the long-term
Clearer relative price signals
2
UK has moved from one of the least stable to
the most stable economy in the G7 and OECD
G7
4
1970s
OECD
9
G7
5
1980s
OECD
17
Stability of the
output gap
4
10
7
23
5
10
1
1
Stability of
inflation
6
18
5
17
7
20
1
1
Stability of real
GDP growth
1990-1997
G7 OECD
5
17
1998-2004
G7 OECD
1
2
3
GDP and inflation volatility in the
G7 – 1997-2005
2.0
Standard deviation
Lower GDP growth volatility
GDP Growth Volatility
Japan
1.5
1.0
USA
France
Canada
Italy
Germany
UK
Lower inflation volatility
0.5
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Inflation Volatility
4
GDP growth has risen as GDP
growth volatility has fallen
Lower GDP growth volatility
GDP growth volatility
3.0
2.5
2.0
1.5
1.0
1980s
1970s
1950s
1960s
1990-1997Q2
1997Q32005Q3
Higher GDP growth
0.5
1.5
2.0
2.5
3.0
3.5
Average GDP growth
5
Both inflation and inflation volatility
have fallen
Lower inflation volatility
7
Inflation volatility
6
5
4
3
1970s
1980s
1950s
1990-1997Q2
2
1997Q32005Q3
1
1960s
Lower inflation
0
0
2
4
6
8
10
12
14
Average Inflation
6
Why has UK stability improved?
•
•
Key lesson from pre-1997 is the importance of
having credible macroeconomic frameworks.
Before 1997, macroeconomic policy was
characterised by:





inappropriate objectives;
poorly specified objectives;
a failure to look forward;
unclear and inconsistent roles and responsibilities;
and
Politicisation of monetary policy decisions.
7
Principles of UK fiscal framework
 Transparency in the setting of fiscal policy
objectives
 Stability in the fiscal policy process and in
the way fiscal policy impacts on the economy;
 Responsibility in the management of the
public finances;
 Efficiency in the design and implementation
of fiscal policy and in managing both sides of
the public sector balance sheet; and
 Fairness, including between generations.
8
Fiscal rules
Golden rule:

over the economic cycle, the Government will
borrow only to invest and not to fund current
spending
Sustainable investment rule:

public sector net debt as a % of GDP will be held
over the economic cycle at a stable and prudent level
(40%)
9
Performance of fiscal framework meeting the golden rule
3
Per cent of GDP
2
1
0
-1
-2
-3
-4
Introduction of new fiscal framework
-5
Projections
-6
Average over 1986-87 to 1997-98 cycle
Average over 1997-98 to 2008-09 cycle
-11
10
20
-10
09
20
-09
08
-08
20
07
20
-07
06
20
-06
05
20
-05
04
-04
20
03
-03
20
02
20
-02
01
20
-01
00
20
-00
99
-99
19
98
19
-98
97
19
-97
96
19
-96
95
-95
19
94
19
-94
93
19
-93
92
19
-92
91
-91
19
90
19
-90
89
19
-89
88
19
-88
87
19
19
86
-87
-7
Current budget surplus
10
Public sector net debt
0-1
1
20
1
9-1
0
20
0
8-0
9
20
0
7-0
8
20
0
6-0
7
Introduction of new fiscal framework
20
0
5-0
6
20
0
4-0
5
20
0
3-0
4
20
0
2-0
3
20
0
1-0
2
20
0
0-0
1
20
0
9-0
0
19
9
8-9
9
28
19
9
7-9
8
19
9
6-9
7
19
9
5-9
6
19
9
4-9
5
19
9
3-9
4
19
9
2-9
3
19
9
1-9
2
19
9
0-9
1
19
9
9-9
0
19
8
8-8
9
19
8
7-8
8
19
8
6-8
7
19
8
Performance of fiscal framework – net
debt
44
Per cent of GDP
42
40
38
36
34
32
30
Projections
26
11
Principles of UK monetary policy
framework
 Clear and precise objectives (a 2% annual
rise in CPI inflation)
 Full operational independence for the Bank
of England’s Monetary Policy Committee
(MPC)
 Openness, transparency and accountability
 Credibility and flexibility
12
Performance of monetary policy
framework
10
RPIX Inflation Expectations
9
RPIX Inflation
8
CPI Inflation
7
CPI Expectations
Per cent
6
Introduction of new
framework
5
4
Introduction of new CPI
target
2.5% RPIX target
3
2
Introduction of
inflation targeting
Target range
2 per cent CPI target
1
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
13
Summary
•
•
•
•
Important to get the principles right in
macroeconomic policy frameworks.
Precise form of rules differs between countries
according to national circumstances
Credibility is achieved by having rules
underpinned by the right objectives and
ensuring that the rules are met
Credibility ensures that macroeconomic
frameworks play a full role in contributing to
stability.
14
Role of GES and HMT economists
•
•
•
Macro stability also helps allocate resources within
government
GES - 900 economists working in 32 departments
100+ economists in HM Treasury – increasing
proportion looking beyond macro policy.



Analyse evidence to inform policy
Advise on choices & alternatives
Make a difference on important issues
15
Role of OECD and EU
•
•
•
•
Economies of scale
Learning from the experience of other
countries
OECD pioneers of micro peer review
EU peer review, Lisbon Strategy
16