In this paper we argue for a new approach to monetary and fiscal policy. During the Great Moderation, the inflation targeting regime worked well. Central banks used the interest rate to stabilize inflation, and-subject to inflation being controlled-stabilized the level of demand. Fiscal policy exerted discipline over the public-sector deficits, thereby-indirectly-managing the level of public debt. Such 'fiscal housekeeping' worked well, because the monetary authorities were stabilizing the economy. But once private-sector deleveraging led to the Great Recession, and interest rates hit their zero bound, the outcome could no longer be managed by monetary policy. Recovery depended on the 'automatic stabilizers': output and tax revenues have fallen, public debt has been created, and assets have been created which a deleveraging private sector wishes to hold. But the effect has been very gradual. Recovery would have been faster if fiscal policy had been responsible for the restoration of full employment, in an environment which tolerated the necessary rises in public debt. Conversely, policies of austerity, designed to reduce public debt, have slowed the recovery. Growth will not be resumed until the private sector begins to invest strongly again, creating the financial assets which the private sector wishes to hold, thereby enabling public debt to be retired. This has not yet happened because the private sector, correctly, does not believe that macroeconomic policy is capable of sustaining a strong recovery.

Chapter 5 The Oil Market: Context, Selected Features, and Implications Christopher Allsopp, Christopher AllsoppSearch for more papers by this authorBassam Fattouh, Bassam FattouhSearch for more papers by this author Christopher Allsopp, Christopher AllsoppSearch for more papers by this authorBassam Fattouh, Bassam FattouhSearch for more papers by this author Book Editor(s):Andreas Goldthau, Andreas GoldthauSearch for more papers by this author First published: 11 March 2013 https://doi.org/10.1002/9781118326275.ch5Citations: 1 AboutPDFPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShareShare a linkShare onFacebookTwitterLinked InRedditWechat Summary This chapter discusses issues surrounding international oil markets within the wider context of international energy, energy security and climate change policies, the global economy, and producer-consumer relations. First, it examines the position of oil in the energy mix and warns against the dangers of extrapolation from recent history. It argues that diverging views about the future position of oil in the energy mix are mainly about the policies to be adopted and their effectiveness. Two types of policies are discussed in more detail: energy security and climate change. The chapter then looks at pricing in the international oil market, covering the issues of fundamentals versus speculation and the role of regulation and other aspects of market design. It argues that the absence of anticipated feedbacks, via the global economy, demand, supply or change in government policy, contributed to the upward move in oil prices 2002–2008. It also intensified indeterminacy with implications on the oil price formation process. In conclusion, the chapter reverts to some of the big questions and contradictions in the current energy discourse and how they might be resolved. Citing Literature The Handbook of Global Energy Policy RelatedInformation

This article focuses on issues surrounding international oil markets within the wider context of international energy, the global economy, and conflicting agendas such as energy security and climate change. It is suggested that important aspects of the current situation appear 'unsustainable'-increasing uncertainty and raising methodological difficulties for any assessment of likely future developments. It is argued that the dynamics of oil prices during the 2002-9 cycle reflected great uncertainty about future 'fundamentals' as well as the absence of previously anticipated stabilizing feedbacks from supply, from demand, or from policy. It is suggested that damaging oil-price swings could be moderated by better policy, though probably not by financial regulation. In the longer term, the uncertainties remain very great, especially since the tensions between a realist view of likely energy-market developments and the imperatives of the climate change agenda remain unresolved. A wide range of policies in producer and consumer countries are likely to affect not only oil prices but also the contentious issue of the distribution of rents within the industry.

This article examines the new consensus that fiscal policy should have no macroeconomic role in flexible inflation targeting' regimes. There is little basis for this presumption. Fiscal policy remains important insetting the policy mix and in managing shocks and imbalances. The credibility of an inflation-targeting regime should be enhanced rather than reduced is fiscal policy plays its proper role. It is true, nevertheless, that the costs of focusing fiscal policy narrowly on public-sector concerns may not be very great, most of the time. However, when interest rates cannot be used, the role of fiscal policy must be different. With interest rates at their lower bound of zero, there is no plausible alternative. For asymmetric shocks and adjustments in EMU, fiscal policy needs, ideally, to substitute for the interest-rate policy reaction function of the consensus, but the difficulties are very great. We suggest a policy focus on real exchange rates as a way of resolving some of the dilemmas. There is a serious danger that orthodox views about fiscal policy, drawn from the consensus, will be inappropriately applied, especially in Europe.

The paper argues that an improved …scal policy process might result in improved macroeconomic performance within Europe. Within EMU, a country may have di¢ culty ensuring stability in the face of asymmetric shocks; the response may be unstable, or, even if not, the real exchange rate might overshoot. In this context, the rules of the SGP may interfere with the control of in‡ation control, with the short-run stabilisation of demand, and also with the longer term adjustment of intra-European real exchange rates. We recommend using …scal policy to stabilise in‡ation and also to target the real exchange rate rather than de…cits or debt. Such a policy would require a more active use of …scal policy.

This chapter examines the macroeconomic performance of the euro area. It is widely agreed that this performance has been poor; low growth and poor productivity performance have been combined with high and rising unemployment and, especially in the 'core' countries, with budget deficits and increasing government debt. This poor performance on the real side has not, however, been matched by undershooting on inflation. It thus appears that the 'trade-off between growth and inflationary pressure has become highly adverse within the euro area. The Lisbon 'agenda' of reforms to the European macro-economy — which was intended to improve the potential for non-inflationary growth — appears to be in tatters.KeywordsInterest RateMonetary PolicyPrice LevelFiscal PolicyEuro AreaThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

‘A Conibution to the Theory of Economic Growth’ by Robert M. Solow, published in February 1956, 1 is among the most influential and revered articles in economic theory. The essay—along with its ‘growth-accounting’ companion the following year 2 —transformed growth theory from arguably obscure debates about stability and gloomy knife-edge properties into a fully fledged, flexible framework for analysing key growth questions: e.g. the impact of changes in savings, population, depreciation, and technical progress on the level and growth of output; the nature of transition to steady states; the possibility of convergence and catch-up between countries; etc. Fifty years on, the ‘Solow growth model’ is still at the heart of modern growth theory. But of course, nothing stays still, not least economic theory. In the meantime there have been numerous extensions made to the model and many controversies heaped upon it. Typical examples include incorporating endogenous technical progress and human...

The United Kingdom*s monetary policy strategy is one of floating exchange rates and inflation forecast targeting, with the targeted measure referring to consumer prices. We consider whether it is welfare-reducing to target inflation in the CPI rather than in a narrower index; and the role of the exchange rate in the transmission of monetary policy actions to CPI inflation. We argue that it is appropriate to model imports as intermediate goods rather than as goods consumed directly by households. This leads to a simpler transmission mechanism of monetary policy, while also offering a sustainable explanation fore the weakness of the exchange rate/inflation relationship and making consumer price inflation an appropriate monetary policy target.

The UK's monetary policy strategy is one of floating exchange rates and inflation forecast targeting, with the targeted measure referring to consumer prices. We consider whether it is welfare-reducing to target inflation in the CPI rather than in a narrower index and the role of the exchange rate in the transmission of monetary policy actions to CPI inflation. It is appropriate to model imports as intermediate goods rather than goods consumed directly by households. This leads to a simpler transmission mechanism of monetary policy while also offering a sustainable explanation of the weakness of the exchange rate/inflation relationship and making consumer price inflation an appropriate monetary policy target.

In this paper, Christopher Allsopp of the Monetary Policy Committee discusses the two-way interaction between policy and academic enquiry regarding rules for monetary policy. The emerging consensus on monetary policy is described; in that context, some of the features of the current UK system are outlined, which seem particularly important. From a political-economy point of view, what really matters is that an appropriate policy framework should be instituted with the right general properties; a second set of questions, about improving or even optimising performance, can then be considered. Early worries that publicly expressed disagreements, and public knowledge of closely split votes, would work against the of the UK system, now appear unfounded. The relevant meaning of credibility of policy is a reputation for competence and trust in the system, and it is argued that the UK system has achieved this reputation. In addition, the monetary policy system in the United Kingdom is as transparent and accountable as any in the world. It is argued that the potential costs to and transparency weigh heavily against giving the interest rate another role (eg responding to asset price bubbles) beside pursuit of the inflation target. The paper concludes with some remarks on forecasting procedures in the face of structural change, and on the appropriate combination of monetary and fiscal policy.

Fiscal policy is one of the three pillars of what Dr. Ottmar Issing (2002) has called the Maastricht Assignment. For the Eurozone as a whole, the Central Bank is responsible for area-wide price stability. The twelve national fiscal authorities are responsible for fiscal policy - country by country - subject to the provisions of the Stability and Growth Pact (SGP). The third pillar involves supply-side issues and wage/price developments and is the responsibility of "national governments and the social partners". Issing has argued that this assignment provides a clear division of roles and responsibilities - and that no further macroeconomic coordination is necessary or desirable. In this article, Christopher Allsopp assesses the framework for fiscal policy in the Eurozone, arguing for a system that is more decentralised; ensures "sustainability" as a primary objective; and, subject to that, allows for activist stabilisation policy against country-specific shocks.

In this speech, Christopher Allsopp discusses UK monetary policy in the context of emerging global and domestic imbalances, outlining the kinds of responses that should be anticipated under the present monetary policy framework. Negative shocks from the world economy bear particularly hard on the manufacturing and traded goods sectors but, since they lower inflationary pressure, lead to an offsetting policy of lower interest rates. To an extent, the present two-speed economy is the result. But the domestic imbalances also reflect the more long-standing problem of the rise in sterling since 1996, especially relative to the euro. It is argued that a significant depreciation of sterling, a risk given present imbalances, need not, under present circumstances, lead to a major increase in RPIX inflation and, moreover, that a once-and-for-all rise in prices due to a depreciation is not inconsistent with the United Kingdom's inflation target, provided policy is non-accommodating against second round effects. On a third aspect, it is suggested that the main risk from buoyant consumer demand and low savings in the short term is a substantial slowdown later which could imply an undershoot of inflation below target unless corrected by policy action. It is stressed throughout that a major stabilising force in the world economy and in the United Kingdom is the expectation that policy will act to keep output close to potential and inflation on target.

This paper reviews the functioning of the Economic and Monetary Union over the first 4 years of its existence. Monetary policy is viewed as having been of the 'inflation-targeting' type, but with a tendency towards delay and conservatism in adjustment, which may also reflect over-optimistic output growth forecasts. The resulting pressure on the Stability and Growth Pact (SGP) illustrates the weakness in the 'consensus view' of the harmonious interaction of monetary, fiscal, and supply-side policies, which requires policy in all three areas to be 'correct'. In discussing reform of the SGP, a looser but still constraining form of fiscal agreement is advocated. The supply-side and balance-of-payments issues involved in inter-country adjustment also interact importantly with the SGP and are identified as key areas of difficulty in a still 'immature' monetary union, with separate labour-market structures. Here the mechanisms for coordination are more or less absent.

To make a presentation on the future of macroeconomic policy making in the EU is a daunting task. Until recently, this would have involved analysing macroeconomic developments in 15 countries. With the start of EMU in 1999, and now with the successful launch of the euro itself, the task looks, on the surface, a little easier — since the 12 countries of the euro area begin to look more like a macroeconomic entity: there is, after all, a single currency and a single monetary policy for the twelve, with only three countries (Sweden, Denmark and the UK) still outside. But even if one puts aside the position of the “outs”, the macroeconomic issues facing Europe are complex and unusual. A centralised monetary policy, determined by a constitutionally independent European Central Bank (the ECB), interacts with twelve different and politically independent fiscal authorities and twelve different labour markets. Even to describe the system in this way suggests that coordination issues, between a centralised monetary policy and national fiscal policies and between different countries’ labour market policies are likely to be at the heart of the European policy debate over the coming years.

In this paper we discuss the emergence of the new European macroeconomic structure within EMU. We focus on three important elements: the wage-fixing authorities in each country the fiscal authorities in each country, and the single European Central Bank (ECB). We identify serious problems which might arise in coordinating both the wage-setters and the fiscal authorities, and argue that these problems could be exacerbated if the ECB conducts monetary policy inappropriately In the light of this we provide recommendations for the conduct of monetary policy by the ECB. The paper also briefly discusses financial stability issues and the interaction between the countries in EMU and the rest of the world.

With the successful launch of EMU at the beginning of January 1999, the key question is how well the new grouping of 11 countries – Euroland – will perform macroeconomically. Strains and difficulties between countries appear solvable if the context is a healthy growing Europe, but are more dangerous if the group as a whole performs badly. In this article Christopher Allsopp and David Vines argue that the European Central Bank has a pivotal role. This is not just for the obvious reason, enshrined in the Treaty, that the independent Bank is charged with ensuring price stability. Beyond that, the ECB will necessarily be the main co‐ordinating institution for macroeconomic policy. The single monetary authority interacts, for good or ill, with eleven national governments, eleven fiscal authorities and eleven national labour markets. The game is rigged in an unfamiliar way.