First, he explains that “the depreciation was not caused by monetary policy” – it was not accompanied by the movements in market-based measures of forward inflation that one would have expected if monetary policy was at its root. He states: “...if monetary policy were loosened significantly, independently of anything else, you would see sell-offs not just in the currency but in (non-indexed) bonds as well. That’s not what happened in 2008.” Rather, he argues, the depreciation “...reflects the need to rebalance UK supply – away from non traded goods and services, and towards the production of tradables – in order to match an equivalent shift in the composition of demand”. He suggests that this shift in the composition of demand has come about primarily because of the vulnerability of tax revenues to the financial crisis. Tax revenues in 2009-10 were £109bn lower than expected in early 2007, “...bigger than the decline in government receipts in the Eurozone (relative to GDP) and worth almost a third of current spending on public services. Even without markets’ concerns about the exposure of taxpayers to banks’ bad assets, and even relative to the UK’s trading partners, this was surely enough materially to contract ... government consumption over the future and with it the demand for non-traded UK output.”
Published on
26 September 2011
Press release