Is the UK productivity slowdown unprecedented?

We estimate trend UK labour productivity growth using a Hodrick-Prescott filter method. We use the results to compare downturns where the economy fell below its pre-existing trend. We find that the current productivity slowdown has resulted in productivity being 19.7 per cent below the pre-2008 trend path in 2018. This is nearly double the previous worst productivity shortfall ten years after the start of a downturn. On this criterion the slowdown is unprecedented in the past 250 years. We conjecture that this reflects a combination of adverse circumstances, namely, a financial crisis, a weakening impact of ICT and impending Brexit

Measuring the Euro area output gap using multivariate unobserved components models containing phase shifts

This paper analyses the impact of using different macroeconomic variables and output decompositions to estimate the euro area output gap. We estimate twelve multivariate unobserved components models with phase shifts being allowed between individual cyclical components. As output decomposition plays a central role in all multivariate models, three different output decompositions are utilised; these are a first-order stochastic cycle combined with either a local linear trend or a damped slope trend, and a second-order cycle plus an appropriate trend specification (a trend following a random walk with a constant drift is generally preferred). We also extend the commonly used trivariate models of output, inflation and unemployment to incorporate a fourth variable, either investment or industrial production. We find that the four-variate model incorporating industrial production produces the most satisfactory output gap estimates, especially when the output gap is modelled as a first-order cycle. In addition, measuring phase shifts and calculating contemporaneous correlations between individual cyclical components provides a better understanding of the different gap estimates. We conclude that the output gap estimate in all models leads the cyclical components of inflation and unemployment, but lags those of industrial production and investment. Furthermore, the output gap estimates obtained from the four-variate model including investment present the longest leads-and-lags with respect to other cyclical components, implying that investment appears to be more of a leading indicator than a coincident variable for the euro area.output gap, higher-order cycle, industrial production, state-space, Kalman filter.

Fiscal policy in a depressed economy : was there a ‘free lunch’ in 1930s’ Britain?

We report estimates of the fiscal multiplier for interwar Britain based on quarterly data and timeseries econometrics. We find that the government-expenditure multiplier was in the range 0.3 to 0.9 even during the period that interest rates were at the lower bound. The scope for a ‘Keynesian solution’to recession was much less than is generally supposed. In the later 1930s but not before Britain’s exit from the gold standard, there was a ‘fiscal free lunch’in that deficit-financed government spending would have improved public finances enough to pay for the interest on the extra debt

Rearmament to the rescue? New estimates of the impact of ‘Keynesian’ policies in 1930s’ Britain

We report estimates of the fiscal multiplier for interwar Britain based on quarterly data, time-series econometrics, and ‘defense news’. We find that the government expenditure multiplier was in the range 0.3 to 0.8, much lower than previous estimates. The scope for a Keynesian solution to recession was less than is generally supposed. We find that rearmament gave a smaller boost to real GDP than previously claimed. Rearmament may, however, have had a larger impact than a temporary public works program of similar magnitude if private investment anticipated the need to add capacity to cope with future defense spending

Does the exchange rate regime affect the economy?

Foreign exchange rates ; Great Britain

Econometric modelling of the relationship between money, income and interest rates in the U.K. : 1963-1978

This thesis investigates empirically the relationship between money, income and interest rates in the U.K. over the period 1963 to 1978. After developing univariate models of the time series' proxying these theoretical variables, the paradox existing between the conventional theoretical model, the IS/LM framework, and the usual empirical practice of directly estimating the demand for money function is investigated. It is shown that the crucial issues are the exogeneity assumptions placed on the IS/LM framework. As such assumptions cannot be tested in a static framework, a dynamic analogue of the IS/LM model is developed, along with appropriate methods for testing exogeneity in dynamic multivariate systems. Empirical tests show that the assumptions of the exogeneity of money and government expenditure are invalid, but that the direct estimation of demand for money functions is appropriate. This leads to an investigation of the dynamic structure and functional form of this function using recently developed techniques based on specification search procedures. A major conclusion of this study is that the IS/LM model is an invalid framework for empirical research, and in particular money cannot be regarded as being exogenously determined. Indeed, there is no evidence of feedback from money to either real income or prices, although both statistical and economic reasons are advanced for the possibility that such feedback cannot be detected by the techniques employed. Important short run dynamic effects are found on the demand for money with respect to real income, prices and interest rates. Furthermore, both the wage rate and an own rate of interest variable are also important determinants of money demand. The demand for narrow money function also exhibits sensible long run behaviour and has an adequate predictive performance but, unfortunately, the broad money function has no long run properties and predicts unsatisfactorily

Trends and cycles in Euro area real GDP

This paper examines the time series properties of real GDP in the Euro area (EU 11), both prior to and after the adoption of the Euro in January 1999. We employ the relatively recent "optimal approximation" band pass filter developed by Christiano and Fitzgerald (2003) in order to identify a Euro-zone business cycle. We also utilise two alternative assumptions regarding the behaviour of the trend component of Euro area real GDP. The empirical results suggest that the single currency experiment appears to have reduced trend growth in the Euro zone, both ex-ante during the Maastricht nominal convergence phase, and also ex-post, during the period 2001Q1 to 2005Q4. With respect to cyclical behaviour, we identify a very robust measure of the Euro zone business cycle in the post 1994 period which does not appear to be sensitive to the particular assumption made regarding the trend rate of growth of real GDP. This type of result should facilitate a more accurate assessment of the extent to which individual countries and groups of countries are converged with respect to the Euro area business cycle

Six centuries of British economic growth : a time-series perspective

This paper provides a time-series analysis of recent annual estimates of real GDP and industrial output covering 1270–1913. We show that growth can be regarded as a segmented trend-stationary process. On this basis, we find that trend growth of real GDP per person was zero prior to the 1660s but then experienced two significant accelerations, pre- and post-industrial revolution. We also find that the hallmark of the industrial revolution is a substantial increase in the trend rate of growth of industrial output rather than being an episode of difference stationary growth

Predicting medium-term TFP growth in the United States : econometrics vs ‘techno-optimism’

We analyse TFP growth in the US business sector using a basic unobserved component model where trend growth follows a random walk and the noise is a first order autoregression. This is fitted using a Kalman-filter methodology. We find that trend TFP growth has declined steadily from 1.5 to 1.0 per cent per year over the past 50 years. Nevertheless, recent trends are not a good guide to actual medium-term TFP growth. This exhibits substantial variations and is quite unpredictable. Techno-optimists should not give best to productivity pessimists simply because recent TFP growth has been weak