Governments around the world have been reacting to the global financial crisis by cutting interest rates in the hope that an expansionary monetary policy will help prevent recession or perhaps minimise the length, depth and severity of recession. In the articles below, we look at interest rate cuts in some countries, but there are many others. Why not use Google news or an equivalent site to try to find some more examples?
Europe
ECB rate cut sets tone for worldwide attempt to spark stalled economies Times Online (5/12/08)
Is the ECB dragging its heels? BBC News Online (4/12/08)
ECB cuts eurozone rates to 2.5% BBC News Online (4/12/08)
Sweden
Sweden, like us, seems to have things in hand Times Online (5/12/08)
Sweden cuts interest rates to 2% BBC News Online (4/12/08)
mesSweden cuts interest rates to 2% BBC News Online (4/12/08)
Australia
Australia cuts interest rates to seven year low Times Online (2/12/08)
Thailand
Large cut in Thai interest rates BBC News Online (3/12/08)
China
China’s central bank cuts rates BBC News Online (26/11/08)
Questions
- Explain the transmission mechanism whereby cuts in interest rates are transmitted to an increase in consumer expenditure.
- Using diagrams as appropriate, show how interest rates are determined in the money markets.
- Discuss the relative effectiveness of monetary policy and fiscal policy in boosting consumer expenditure.
Whilst a recession has a devastating impact on many industries – not least construction and related sectors – there are some firms who will fare much better during a recession. Firms who have products whose demand is income inelastic, or which are even inferior, will feel the impact of the recession much less than those whose goods have a more income elastic demand. The two articles below consider jobs and businesses that are less likely to suffer in recessionary times.
Slump busters: jobs that beat the downturn BBC News Online (27/11/08)
Riding the recession: how some businesses are doing well in the downturn Times Online (23/11/08)
Questions
- Define the terms (i) “normal good” and (ii) “inferior good”.
- What will be the value of the income elasticity of demand for (i) a normal good and (ii) an inferior good?
- Discuss strategies that firms can adopt to minimise the impact of an economic downturn on (a) their total revenue and (b) their profitability.
The Chancellor’s pre-Budget report was a massive political and economic gamble. The government has clearly recognised the potential seriousness of the economic situation and, in an attempt to avoid a prolonged recession, has injected £21bn into the UK economy in the form of tax cuts and spending increases. The headline grabbing changes were a cut in VAT and an increase in the top rate of income tax to 45% for those earning over £150,000 per year, but there was a raft of other changes including £3bn of public-sector infrastructure projects being brought forward.
Will this fiscal kick be enough to prevent a deep recession? The Chancellor clearly thinks so. He has amended his forecasts for economic growth to acknowledge that GDP will fall by 1% in 2009, but he believes growth will bounce back to 1.75% in 2010. The links below are to a selection of articles relating to the pre-Budget report, but there are plenty of other sites offering discussion and analysis of the issues relating to this unprecendented Keynesian fiscal boost.
Pre-Budget Report: Alistair Darling’s £1 trillion debt gamble Times Online (25/11/08)
Pre-budget report 2008 Guardian (25/11/08)
Pre-Budget report 2008 BBC News Online (25/11/08)
Average earners lose out in PBR BBC News Online (25/11/08)
Pre-Budget Report – the documents BBC News Online (25/11/08) Links to all pre-budget report documents as pdf files
Robinson and Peston analysis of PBR BBC News Online (25/11/08) Video from the Daily Politics show
Darling needs to cure a nation hooked on debt Guardian (24/11/08)
Darling unveils borrowing gamble BBC News Online (24/11/08)
Analysis: is this the death of New Labour? Times Online (24/11/08)
Alistair Darling announces £20bn economic boost Times Online (24/11/08)
Alistair Darling’s £20bn tax giveaway Times Online (24/11/08)
The mother of all gambles Guardian (24/11/08)
Obama and Darling: compare and contrast Guardian (24/11/08) Video comparing the packages announced by Alistair Darling and Barack Obama
The £21bn tax gamble Guardian (25/11/08)
Call this a cure? Guardian (25/11/08)
Questions
- Write a short paragraph outlining the main policies set out in the pre-Budget report.
- Evaluate the likely success of the policies announced in the pre-Budget report in preventing a prolonged recession for the UK economy.
- Discuss the short-term and long-term impact on the UK money markets of the high levels of borrowing required to fund the tax and spending changes set out in the 2008 pre-Budget report.
- Assess the likely impact of the increase in the top tax rate of income tax to 45% on (i) consumer expenditure growth, (ii) tax revenues, and (iii) the incentive for higher rate tax payers to work harder.
- Discuss whether a fiscal solution, such as that set out in the pre-budget report, or a monetary policy solution will be more effective at preventing a prolonged recession in the UK..
Some economists believe that deflation is now a more serious threat than inflation. If this is the case then conventional monetary policy may not be enough to prevent deflation. In the article below, Gavyn Davies argues that the solution is to start thinking like South American dictators and print more money!
We must start thinking like South American dictators Guardian (13/11/08)
Questions
- Explain what is meant by “deflation”.
- Examine the link between deflation and depression.
- Explain why deflation requires a different policy response from inflation.
- Discuss the likely success of a policy of “printing money” in preventing deflation.
- Assess the impact of financing tax cuts through the sale of government bonds in a deflationary situation.
The possibility of recession in the UK, the USA and Europe has attracted a great deal of media attention and in this podcast Andy Beharrell considers whether there is any real evidence of recession. The podcast considers the definition of recession, the causes of recession and the different approaches taken by governments to try to keep their economies out of recession. While the UK and Europe have adopted essentially rules-based policy approaches, the USA has taken a more interventionist and discretionary approach with a significant loosening of both monetary and fiscal policy.
