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  • Author: David G. Blanchflower, David N. F. Bell
  • Publication Date: 07-2014
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper examines the amount of slack in the UK labor market and finds the downward adjustments made by the Monetary Policy Committee (MPC) to both unemployment and underemployment invalid. Without evidence to support its assessment of the output gap, the MPC reduces the level of unemployment based on its claim that long-term unemployment does not affect wages. The authors produce evidence to the contrary and present arguments on why the MPC's halving of the level of underemployment in the United Kingdom is inappropriate. Bell and Blanchflower set out arguments on why they believe the level of slack is greater than the MPC calibrates. Consistent with that is the fact that real wages in the United Kingdom continue to fall.
  • Topic: Economics, Markets, Labor Issues
  • Political Geography: United Kingdom, Europe
  • Author: Tomas Hellebrandt
  • Publication Date: 01-2014
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: The Great Recession, which cost tens of millions of jobs, a collapse of asset values around the world, and threatened the global financial system, has generated renewed concern over the long-standing issue of the fairness of the distribution of wealth and income in many societies. Economic inequality has increased in the United States and many other advanced economies over the past 20 to 30 years. This trend generated less worry in the boom years, when unemployment rates were low and cheap credit enabled consumers to borrow and maintain higher standards of living, masking the impact of growing income disparity on consumption patterns and perceptions of well-being.
  • Topic: Debt, Economics, International Trade and Finance, Poverty, Social Stratification, Financial Crisis
  • Political Geography: United States, United Kingdom, Germany, Spain, Italy, Ireland
  • Author: Joseph E. Gagnon
  • Publication Date: 11-2013
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: There is a long-standing debate among economists and policymakers on the benefits of flexible versus fixed exchange rates (Klein and Shambaugh 2010). In principle, flexible exchange rates allow a country's central bank to focus on stabilizing economic growth and inflation, which are the ultimate goals of monetary policy. However, some argue that in practice central banks often do not use their powers wisely and it may be better to restrict their freedom by requiring them to peg their currency to that of an important trading partner. Others note that flexible exchange rates are far more volatile than fundamental factors can explain (Flood and Rose 1995), raising the possibility that they may introduce wasteful cross-sectoral fluctuations in economic activity. One common viewpoint is that flexible exchange rates may be fine for large countries but that the smallest countries are better off with fixed exchange rates (Åslund 2010).
  • Topic: Economics, Foreign Exchange, International Trade and Finance, Markets, Financial Crisis
  • Political Geography: United States, Japan, China, United Kingdom
  • Author: Daniel Danxia Xie
  • Publication Date: 02-2011
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This paper provides new evidence on the long-run relationship between economic growth and labor's share in national income, based on a comprehensive panel data set for 123 countries from 1950 to 2004. Xie's primary finding is that labor's share follows a cubic relationship with real GDP per capita over the long process of development. At the beginning of the modern economic growth process, the share of labor in national income first decreases until an initial threshold is reached. After that, labor's share keeps increasing until the country's GDP per capita reaches a second threshold before falling again. Xie argues that these dynamics apply not only to the less developed countries in the postwar years, but also to the advanced countries like the United States and the United Kingdom during their early economic take-offs, starting in the late 18th and 19th century, respectively. Finally, he proposes a two-sector constant elasticity of substitution (CES)-type growth model and simulate the model to replicate and explain the possible mechanism behind such a nonlinear pattern of movements in labor's share.
  • Topic: Economics, International Trade and Finance, Labor Issues, Monetary Policy
  • Political Geography: United States, United Kingdom
  • Author: Carmen M. Reinhart
  • Publication Date: 04-2011
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of "financial repression." Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In this paper, the authors describe some of the regulatory measures and policy actions that characterized the heyday of the financial repression era. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historical standards). For the advanced economies in Reinhart and Sbrancia's sample, real interest rates were negative roughly half of the time during 1945–80. For the United States and the United Kingdom, their estimates of the annual liquidation of debt via negative real interest rates amounted on average to 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum).
  • Topic: Debt, Economics, International Trade and Finance, Markets
  • Political Geography: United States, United Kingdom
  • Author: Adam S. Posen
  • Publication Date: 06-2010
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Japan's Great Recession was the result of a series of macroeconomic and financial policy mistakes. Thus, it was largely avoidable once the initial shock from the bubble bursting had passed. The aberration in Japan's recession was not the behaviour of growth, which is best seen as a series of recoveries aborted by policy errors. Rather, the surprise was the persistent steadiness of limited deflation, even after recovery took place. This is a more fundamental challenge to our basic macroeconomic understanding than is commonly recognized. The UK and US economies are at low risk of having recurrent recessions through macroeconomic policy mistakes—but deflation itself cannot be ruled out. The United Kingdom worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had. Also, Japan did not face poor prospects for external demand and the need to reallocate productive resources across export sectors during its Great Recession. Many economies do now face this challenge simultaneously, which may limit the pace of, and their share in, the global recovery.
  • Topic: Economics, Markets, Monetary Policy, Financial Crisis
  • Political Geography: United States, Japan, United Kingdom
  • Author: Adam S. Posen
  • Publication Date: 10-2010
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: In this policy brief I present my view on the role of monetary policy in our recovery and whether the major central banks in the United Kingdom and beyond should be doing more in the coming months. Of course, every central bank's policysetting committee has to make its own assessment of the right policy measures for its economy, based on its own forecastand the mandate legally set for it. Thus, I am not presuming to offer a “one size fits all” prescription for central bankers beyond the United Kingdom. I would like, however, to try to give some general assessment of the common challenges we face, and what I believe to be the appropriate monetary policy response, barring special circumstances. Not that there will be any doubt about it, but for the record, these are solely my own personal views.
  • Topic: Economics, Globalization, Global Recession, Monetary Policy, Financial Crisis
  • Political Geography: United Kingdom
  • Author: Gary Clyde Hufbauer
  • Publication Date: 05-2009
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: In 2007 the Second Circuit Court of Appeals held that US companies that had done business with apartheid South Africa could be found liable for monetary damages under the Alien Tort Statute (ATS) of 1789 (Khulumani v. Barclay Nat. Bank Ltd., 504 F.3d 254 [2d Cir. 2007]). Liability arises, the Second Circuit declared, from their possible connections with human rights violations committed by South Africa during the apartheid era. Firms named in the suit include Bank of America, IBM, Coca-Cola, and General Motors. The governments of the United Kingdom, Germany, and Switzerland all opposed the lawsuit, as did the government of South Africa, which argued that the suit ran counter to its policy of reconciliation. The Bush administration also opposed the suit, but the Second Circuit rejected the argument that the cases could be dismissed for foreign policy reasons.
  • Topic: Apartheid, Human Rights, International Law, International Trade and Finance
  • Political Geography: Africa, United States, United Kingdom, America, South Africa, Germany
  • Author: Adam S. Posen, Nicolas Véron
  • Publication Date: 06-2009
  • Content Type: Policy Brief
  • Institution: Peterson Institute for International Economics
  • Abstract: Since mid-2007, public authorities in the European Union have broadly met the challenge of ensuring a functional degree of liquidity and preventing financial meltdown. The Eurosystem has even been ahead of the curve compared with the Federal Reserve and the Bank of England in discounting early on a wide variety of assets to a range of counterparties. However, despite unprecedented central bank intervention, extensive government guarantees since October 2008, and macroeconomic assistance (with the International Monetary Fund) to the European Union's weakest member states, the underlying state of continental Europe's banking industry remains very fragile.
  • Topic: Economics, Markets, Monetary Policy
  • Political Geography: United States, United Kingdom, Europe
  • Author: Adam S. Posen, Daniel Popov Gould
  • Publication Date: 08-2006
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: This working paper investigates the European Monetary Unification's (EMU) effect on wage restraint—the degree to which wage increases do or do not exceed productivity growth. We find in cross-sectional investigations that wage restraint either is unchanged or has increased following EMU in the vast majority of countries. This finding contradicts the predictions of a widely cited family of models of coordination of labor market bargaining. In particular, one would have expected Germany to display the greatest decline in wage restraint post-EMU under these models, but in our time-series analysis we find no indication of such a decline. The overall shift toward greater wage restraint is consistent with the models that emphasize the gains from monetary credibility. The time-series evidence on Italy, which shows a significant increase in wage restraint after eurozone entry, also supports this view. That said, the increase in wage restraint in the eurozone is matched by that associated with the increase in credibility seen in the United Kingdom and Sweden after their adoption of inflation targeting post-1992.
  • Topic: Economics, International Trade and Finance
  • Political Geography: United Kingdom, Europe, Germany, Sweden
  • Author: Marcus Noland
  • Publication Date: 06-2005
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Arab political regimes are both unusually undemocratic and unusually stable. A series of nested statistical models are reported to parse competing explanations. The democratic deficit is comprehensible in terms of lack of modernization, British colonial history, neighborhood effects, reliance on taxes for government finance, and the Arab population share. Interpretation of the last variable is problematic: It could point to some antidemocratic aspect of Arab culture (though this appears not to be supported by survey evidence), or it could be a proxy for some unobservable such as investment in institutions of internal repression that may not be culturally determined and instead reflect elite preferences. Hypotheses that did not receive robust support include the presence of oil rents, the status of women, conflict with Israel or other neighbors, or Islam. The odds on liberalizing transitions occurring are low but rising. In this respect the distinction between the interpretation of the Arab ethnic share as an intrinsic cultural marker and as a proxy for some unobservable is important-if the former is correct, then one would expect the likelihood of regime change to rise only gradually over time, whereas if it is the latter, the probabilities may exhibit much greater temporal variability.
  • Topic: Economics, Government, Politics
  • Political Geography: United Kingdom, Middle East, Israel, Arabia
  • Author: Fred Bergsten
  • Publication Date: 04-2005
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: The dollar has been the dominant currency of the world economy for almost a century for a single overwhelming reason: It had no competition. No other economy came close to the size of the United States. Hence no currency could acquire the network externalities, economies of scale and scope, and public goods benefits necessary to rival the dollar at the global level. A similar situation for the United Kingdom explains sterling's dominance in the 19th century.
  • Topic: Economics, International Trade and Finance
  • Political Geography: United States, United Kingdom, Europe
  • Author: Martin Wolf
  • Publication Date: 04-2005
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Ours is not the first age of globalization. The decades before the First World War were remarkably similar to our own era. Under the aegis of the United Kingdom and stimulated by a host of technological advances, the world enjoyed an era of liberal trade, remarkably free movement of people, and almost entirely free movement of capital. The world also enjoyed an unprecedented rise in prosperity. According to the economic historian, Angus Maddison, real GDP per head rose at a rate of 1.3 percent a year in the world as a whole between 1870 and 1913. This is not far short of the improvement of the past three decades. As table 1 shows, only Asia and Africa, both victims of colonialism, failed to share in the rising prosperity.
  • Topic: International Relations, Economics, Globalization, War
  • Political Geography: Africa, United Kingdom, Asia