The yield of income tax varies automatically with movements in personal income as well as with discretionary changes in tax rates and allowances. In forecasting and for historical appraisal of fiscal policy there is a need to specify the automatic relationship between tax and income movements. In the former case this means specifying an accurate direct tax function in the forecasting model (i.e., identifying endogenous tax movements). From the descriptive, historical, point of view, it is possible to use such a function both to understand the ‘built-in’ properties of the budgetary system and, at the same time, to create a more complete picture of budgetary intervention than is given by the treatment of discretionary changes alone as indicators of fiscal policy. The latter procedure, which arises from the traditional British approach to budget-making (while not necessarily an inaccurate way of formulating policy), does tend to prevent an accurate picture of the complete Government intervention being formed by observers, and may result in expenditure, tax and monetary decisions being taken and analysed in a fragmented framework.

In interesting times several things may happen simultaneously, and they may have connected roots. The financial turmoil that developed initially in the US banking sector had its roots in financial innovation that had made available cheap finance and increased demand for housing. This wave of low cost finance had spread to Europe, and house prices rose in a correlated way. The increase in demand in the world economy that resulted from strong growth in lending and high asset values helped raise output growth outside the OECD, and this in turn put upward pressure on oil prices. Markets sometimes work slowly, and the effects of the increase in demand on prices appear to be coming through just as the asset bubble is collapsing. The sequence of events was not inevitable, as low personal sector saving in the US and the UK as well as elsewhere could have been offset by tighter fiscal policy, and better prudential regulation of lenders would also definitely have helped. The desire to move financial regulation from the central bank, as in the UK, may have been for good, competition based, reasons, but it has meant that financial sector oversight has not taken account of the macroeconomic implications of a wave of lending that rested on risky financial innovation and therefore it has not properly addressed the issue of systemic risk (see Barrell and Davis, 2005). The resulting financial turmoil has meant that banks have made losses, and have been unable to trust each other's solvency when making deals. As a result three month interbank rates have risen well above central bank intervention rates, as can be seen in figure 1.

This article examines from two angles changes in the competitiveness of United Kingdom exports since devaluation. First, it considers both in total and in some area and commodity detail recent changes in the United Kingdom's share of world trade in manufactures, particularly between the periods October 1966/September 1967 and October 1967/September 1968, and compares them with previous changes over the whole period from the mid-1950s. Secondly, it gives the results of some special inquiries conducted at the end of last year among business firms in Australia, New Zealand, and South Africa and earlier (and on a smaller scale) in West Germany.

Macro Modelling Notes is a new section of the Review, which we hope will appear on a regular basis. It will contain a small number of very short papers that have arisen from applied macro modelling work at the Institute or elsewhere. In the course of building and operating macro models, a large amount of information is used and produced that may never enter the public domain. This may be because the information is not substantial enough to justify a whole journal article, or because it is specific to the practice of using a macro econometric model. However this information is often of general interest to other economists, and is nearly always helpful to other macro modellers. This section is designed as an outlet for information of this kind, which might otherwise not be published in any readily accessible form.

The three notes below provide three different examples of this type of note. The first involves econometric practice, and shows how long-run standard errors can be simply derived using standard regression techniques. The second presents some econometric results on export pricing obtained during normal ‘model maintenance’ of our world model GEM. The third considers the problem of setting terminal dates for a consistent expectations model.

This new section of the Review is designed as a vehicle for all UK and overseas macro modellers, and therefore outside submissions are strongly encouraged. Submissions must be of about the length of the notes shown here, and contain relevant material that does not form part of a larger article soon to be published. Unlike Review articles, these notes will not normally be refereed, but the Editorial Board may consult expert advice when necessary.

The past few weeks have seen an intensification of the banking crisis in the United States, with the near failure of Bear Sterns, although some commentators hopefully say that the worst has now passed. In the United Kingdom the gap between the Bank Rate and money market rates has re-opened and is described as indicative of a reluctance of banks to lend to each other. In this commentary we seek to explain the fundamental factors behind recent developments in UK lending markets. We begin by describing the recent experience of the financial services industry in the United Kingdom and putting the crisis, which has been described as the worst since the Second World War, into some sort of perspective.

This paper charts the evolution of mainly empirical research at the NIESR over the 1970s and 80s. As was all too evident there were very large discrete technical improvements in data handling and manipulation over this period. Less well appreciated were the effects on the economy of major supply-side shocks coming from the World economy leading to ‘Stagflation’ and, interconnected but somewhat later, in the UK, marked changes in macro policy regime. This latter was strongly influenced by the seminal papers of Lucas (1976) and Sims (1980); both highly critical of the then current practices in macroeconomics, though each having very different intellectual stances. The response in the NIESR was to engage at an early stage in these innovations; applying the mantra that an informed criticism was more efficient than an uninformed one. During this period it became a leader in the econometrics of applied macro modelling under different expectations assumptions, including the rational expectations hypothesis (REH). Throughout, it remained critical of the anti-empirical drift encouraged in the Lucas Critique, criticism borne out more recently by the financial instability of the 1990s and the crisis that followed.

An often overlooked strategy for fighting the COVID-19 pandemic is group testing. Its main advantage is that it can scale, enabling the regular testing of the whole population. We argue that another advantage is that it can induce social distancing. Using a simple model, we show that if a group tests positive and its members are in close social proximity, then they will rationally choose not to meet. The driving force is the uncertainty about who has the virus and the fact that the group cares about its collective welfare. We therefore propose identifying socially connected groups, such as colleagues, friends and neighbours, and testing them regularly.

I discuss six tools available to monetary policy makers. Three of these have been used since the inception of central banking. Three are new and were introduced in the aftermath of the 2008 financial crisis. I argue that, when the UK Monetary Policy Committee raises the interest rate, it should maintain a large balance sheet that consists of both risky and safe assets. Further, the Bank should trade the risk composition of its balance sheet to promote the stability of asset prices.

Climate change and its consequences are the most important issues affecting the UK economy over the coming century and will present a critical challenge for the UK government moving forward. In particular, the challenge of getting to net zero by 2050 is going to have major ramifications for the macroeconomy. In this commentary, I lay out some of the work that has been done on the implications of climate change and the transition to net zero for the macroeconomy. Economic activity as currently structured involves using fossil fuels as part of the production process. But this releases carbon dioxide into the atmosphere and leads to higher temperatures. I take this as given, simply noting that if this rise in temperature and the change in weather patterns associated with it are going to be stopped, if not reversed, at some point in the future, then we have to move to a ‘net zero’ (or even ‘net negative’) economy in which output is produced using only those inputs which do not produce greenhouse gases.

A technique for producing balanced national accounts was described by Stone, Champernowne and Meade in 1942, but there has so far been little use of the method in official publications. This article describes the experimental work undertaken recently by the Central Statistical Office and offers a personal view of the potential for further development. A variation of the original method of Stone et al, called partitioned balancing, seems likely to be useful in complex cases.

This article presents clear evidence that current announced climate pledges by Asia-Pacific countries – even those dependent on climate finance – are insufficient to keep the world within a 1.5°C temperature rise. The article provides analysis explaining why and how countries in the region are not being ambitious enough, and proposes three key steps for how to overcome a “decisiveness” deficit to spur further ambition.