Mervyn faces the Music

The Governor and his colleagues faced the press yesterday at the launch of the quarterly inflation report .... here is a selection of comments from them from questions fired from economics journalists, there is some great evaluation in here for AS and A2 economics students!

A2 Macro Diagrams

In our revision session today we were discussing which diagrams can be used in A2 macro questions. Here is the initial list we came up with ... can students and teachers suggest more? I will happily put together a powerpoint with the diagrams suggested.

Policy conflict for the UK economy?

The IMF is forecasting a slowdown in global growth to 3.7% in 2008 and 2009. This is in contrast to recent growth rates of over 5%.

Chart of the Day: Nationwide Consumer Confidence Index

First published in May 2004, the Nationwide Building Society’s consumer confidence index is a recent addition to the phalanx of indices seeking to track changes in household sentiment and give us a lead indicator of where the economic cycle might be heading. 1,000 adults are interviewed each month, in a survey that is the closest we get in the UK to the Conference Board surveys published in the United States,The Index is based on responses to 5 questions included in the survey:

People’s appraisal of current economic conditions
People’s expectations regarding economic conditions six months hence
People’s appraisal of the current employment conditions
People’s expectations regarding employment conditions six months hence
People’s expectations regarding their total family income six months hence

The latest figures were released today and show the weakest confidence since the survey was launched, evidence perhaps that the gloomier economic headlines dominating the papers and TV news coverage in recent days and weeks is starting to show through. Looking a little at the detail within the survey, it seems that people’s expectations for the economy in six months time are improving slightly, but on balance those surveyed still expect house prices to rise during 2008. Perhaps the news on property prices from the last few days will change this perception in the May survey?

Chart of the Day: Construction Sector Confidence

Last week we had lots of coverage and comment on the retreat from mortgage lending by many of the UK’s biggest home finance providers. The essence of the problem is that the lenders are just not as willing to offer loans to people as they were. Profit margins have been squeezed as the wholesale cost of money has risen, and some mortgage providers have effectively left the market for the time being. This is making life very difficult for people needing to get a first-time loan or looking to renew their mortgage deals when fixed rate agreements reach an end.

The result is a sharp fall in the number of property transactions that are falling through because of problems in finding the required level of funding.

Revision: Expectations in Economics

Expectations are forecasts or views that decision makers hold about future prices, sales, incomes, taxes, or other key variables. Our expectations also shape today’s decisions – since expectations can become a “self-fulfilling prophecy.” There is no doubt that expectations play a really important role in determining consumer and business decisions. From speculative behaviour in commodity markets, to the carry trade in foreign exchange and to expectations of changes in tax policy, how our expectations are formed and the factors that might cause them to change matter a great deal. Students can score higher marks for critical evaluation if they bring in the concept of expectations into their discussions.

I have attached a revision mind map in pdf format on expectations in economics. There are many applications of the concept in both AS and A2 micro and macroeconomics.

The mind map includes sections on

Speculative behaviour in markets
Adaptive Expectations
Rational Expectations
Behavioural Economics
Expectations and Government Economic Policy
Expectations of inflation
Microeconomic applications of expectations

Mindmap file
Expectations.mmap

Pdf version of the mindmap
Expectations_in_Economics.pdf

Fed opts to leave a little powder left

It is a sign of the times when a decision to cut (slash) official short term interest rates by 0,75% (taking US rates to 2.25%) comes in below market expectations! The US Fed Reserve has cut the cost of borrowing in a fresh bid to limit the downside risks for the real economy as financial turbulence threatens to dent a huge hole in prospects for the US economy in the coming months. Loads of comment available on this one from virtually every commentator. Evan Davis, the former Economics editor of the BBC was on good form on TV this morning - explaining that cuts in interest rates from the central banks is not really where the problem lies for most consumers. It is the interest rate charged on the lending and borrowing that the banks do between each other which then feeds through into the market for mortgage and other retail loans.

One of the keys to coming out of this crisis will be for banks to recapitalise and improve their own block of funding before they start lending out again. In short, the banks need to attract fresh injections of capital - perhaps from encouraging more of us to save and also from external sources such as the petro-dollars being held by the sovereign wealth funds. Confidence in the different pieces of the financial system is ebbing away - stabilising the markets is the immediate issue and the problem.

Data charts on US and UK interest rates

US_Rate_Cut_March_2008.pdf
UK_Interest_Rates.pdf

Suggested links on the US rate cut

A to Z of AS Macroeconomics!

Teaching at 5.30pm on a Friday afternoon as the fag end of term approaches isn’t great fun but after a successful SWOT analysis of the UK economy yesterday, I set my AS macro group a half hour challenge today - to produce an A to Z of macroeconomics as a prelude to their revision. Working in pairs, they tried to assemble twenty-six entries - it could be a concept, an issue in the news or perhaps a well known economist - anything so long as it had a macroeconomic connection! Similar to the game of Scattegories, teams only scored a mark when their answer was unique within the class.

Double points could be scored for suggestions such as Ben Bernanke, price pressures or credit crunch. Three marks for purchasing power parity! This led to some very creative and quirky answers.

Anyway ... here is a potted (albeit incomplete) summary of the responses. My job over the weekend is to produce a word document that provides a web link to a newpaper or BBC news story for each of them - so that they can access some articles linked to their suggestions whenever they want to. Can blog users suggest other entries? I am happy to email the word file over if you want to try this exercise before the end of term!

US and UK inflation

Latest data on inflation suggests price rises are dampening in the US - opening the door for further rate cuts.

But in the UK there are fears that sustained inflationary pressures will prevent the Monetary Policy Committee of the Bank of England reducing the base rate until at least the summer. Geoff looked at this in detail earlier in the week.

Adaptive expectations?

For over ten years the Bank of England has been keen to manage expectations of inflation. It knows that if people fear a return of high rates of price inflation, they will factor that into their wage demands and there is a risk that the price stability we have enjoyed for fifteen years or more might be under threat. That would make the setting of interest rates even more complicated than normal, particularly given the current economic uncertainties at home and abroad.

With that in mind, the latest quarterly survey of price expectations published by the bank does not make happy bed-time reading for the Governor. Expectations of future inflation rose to 3.3 percent in February - the highest since the Bank started to publish the survey in 1999 and (importantly) more than a percentage point above the actual rate of CPI inflation.

Perhaps this survey is an example of adaptive expectations at work. Families see the rising cost of living every time they go to the supermarket, fill their car with diesel or check their quarterly energy bills. More people than ever before are discovering that the official measure of inflation (the CPI) bears little resemblance to the inflation they feel. The RPI inflation rate which includes housing costs, is much closer to their day-to-day experience.

It might be that we are unduly influenced by the prices we see around us and those highlighted in news broadcasts and on the front pages of the papers. Behind the scenes, the prices of audio-visual products continues to fall, as does the retail prices of clothing and second hand cars!

Whatever the cause, the reality is that rising expectations of inflation will make it more difficult for the MPC to sanction aggressive cuts in interest rates if and when the economy moves into a sharper than expected slowdown.