The Review has now been appearing for more than two years; this article looks critically at our attempts at forecasting. Forecasting is not the Review's only purpose; it aims to provide a regular and systematic analysis of recent economic developments, which allows readers to form their own views of the future. Our forecasts provide one view for them to consider.

The theoretical work presented in this Appendix is not novel; aspects of it have been comprehensively covered elsewhere in various places. The account given in this Appendix is designed to clarify for the interested reader, and to present in a convenient and readily accessible form, the basis for the methods of estimation employed in the article.

The NIESR price index numbers (given in table 27 of the Statistical Appendix) were introduced in the first issue of the Economic Review. They have now been substantially revised. First, the weights of the individual prices are now based on the average of the years 1960 to 1962. This reduces the influence of chance fluctuations which may affect a single year's figures; the years 1960-62 were free of any major disturbances. The indices are shown with the year 1961 as 100. Secondly, the price indicators have been substantially revised; the least reliable ones have been dropped and some new prices have been included.

In the first half of this decade, the world experienced a period of low short and long-term interest rates. Shortterm rates have risen from these low levels, first in Canada and the United Kingdom, then in the United States and finally in the Euro Area. Long-term rates, by contrast, remained low, suggesting that holders of longterm debt expected the rise in short-term rates to be only temporary. Only in the past few months has the apparently anomalous pricing of long-term debt started to disappear. But with interest rates on long-term debt similar to short-term market rates internationally, the market does not yet show that the traditional upwardsloping yield curve and, on this basis, long rates remain depressed. They are also markedly below the levels of two to three years ago.

The Treasury Bill rate is regarded as an exogenous policy instrument in the National Institute's forecasting model. Other interest rates in the model are linked to this rate by term-structure equations. This approach, while justifiable for forecasting, has limitations when the model is used for policy simulations since it ignores the responses of interest rates to changes in economic conditions. This note shows how the properties of the model are affected when interest rates are treated as endogenous.

This paper summarises research on the labour market done over the past two years at the National Institute. It incorporates research into the determinants of employment—including the role of forward-looking behaviour—wage inflation and real wage models, and comments on some policy issues which have arisen in the past five years or so. The research was not aimed at producing a single approach to labour market behaviour, but touched on several separate topics. In part the present paper reflects this relative heterogeneity, although we will try to emphasise common themes where these are relevant.

Can unemployment be cured by flexible labour markets? This current nostrum had little to do with the maintenance of full employment, with little inflation, throughout the 1950s and 1960s. The secret of that success can be traced to the high level of investment, which stimulated both supply and demand in the economy, and enhanced the employability of labour. Downward pressures exerted on the cost of labour appear to have had some effect on unemployment in the 1980s, but are likely to run out of steam before it is reduced to a tolerable level. Attention now needs to be concentrated on enhancing the employability of labour. But whether this is attempted through tax incentives to investment or other means, its purpose will be liable to be thwarted unless accompanied by general restraint in the upward adjustment of real wages.

Modern economic theory gives an important role to expectations as an influence on outcomes. This paper reviews evidence on how well measures of expectations conform to outcomes. It confirms earlier results that measures taken from financial markets perform poorly as predictors of outcomes. Looking at the individual responses to the Confederation of British Industry’s Industrial Trends Survey, it does find, however, that there are significant correlations between expected and realised outcomes of wages, prices, costs orders and employment. It also finds some evidence that actual prices reflect expected future prices, but with a coefficient much lower than economic theory predicts. There is evidence that forecast errors are explained by past forecasts, as well as revisions to the economic outlook, casting doubt on the idea that firms’ forecasts make the best use of the information available at the time. The paper concludes by observing that, while expectations are undoubtedly important, economists need to build on work looking at how they are derived instead of simply assuming they are rational.

Over 50 years ago, New Society first identified a new ‘Oxford School’ considered central to British post-war reconstruction. Based around Nuffield College, it contained five key figures: Hugh Clegg, Allan Flanders, Alan Fox, Bill McCarthy and Arthur Marsh. Other identified contributors were Ben Roberts, John Hughes and legal theorist Otto Kahn-Freund. A second generation included the likes of George Bain, Willy Brown, Richard Hyman, Rod Martin and Roger Undy. Intriguingly, as early as the late 1940s its key theorist Flanders described their social democratic approach to build industrial pluralism as the ‘third way’—obviously a phrase given greater prominence in the 1990s by Tony Blair and Tony Giddens.