This article reports on some results obtained in the course of developing equations to explain, and predict, the behaviour of private manufacturing investment.

Apart from their analytical value, the estimation of formal relationships explaining investment provides a useful supplement for forecasting purposes to the information given by investment intentions surveys such as those carried out by the Board of Trade or the Confederation of British Industry; and for purposes of exploring variants of the main forecast, some formal investment relationships are of course indispensable.

This article presents two models of sterling exchange rates, for which the starting-point is Cassel's synthesis of the purchasing power parity and the asset demand theory of exchange rate determination. The first model generates estimates of equilibrium exchange rates in 1970; the second is designed to explain subsequent monthly deviations of actual rates from these notional 1970 rates and so to provide a system for short-term forecasting of ‘effective’ exchange rates in terms of variables defined in the National Institute's larger model of the economy. Monthly forecasting equations for other major currencies are also estimated and the predictive power of the monthly model is tested—with encouraging results—over the period May-November 1976.

This article sets out a general framework within which the sectoral distribution of pay can be examined. The main evidence on income from employment is then analysed with a view to answering questions about overall changes in total pay bills, and gross earnings of individuals in the public and private sectors.

The view that there is an ‘under-savings’ problem in the UK domestic sector has had an important bearing on the contemporary agenda for policy reform. This paper considers the temporal variation of household expenditure and disposable income described by micro-data observed during the past four decades (1971 to 2009). I find a very close correspondence between the growth of expenditure and disposable income over the sample period, with the implication that households have not offset the well-documented decline in occupational pension provisions during the period through increased private saving out of disposable income.

There is a perception among some commentators and policy analysts that leadership and managerial practices in private schools are superior to those in state schools. Analysing a survey of workplaces in Britain, we find little evidence to support this contention when examining the prevalence of modern human resource management (HRM) practices in schools. Rather, the evidence points to greater use of such practices in state schools. Those practices are correlated with improved school performance in the state sector, but not in the private sector. We discuss the implications of these findings for the policy of encouraging managers of private schools to sponsor state schools.

We estimate the changing value of workplace pensions in the UK and incorporate their value into an estimate of the public sector pay differential. Falling pension membership in the private sector and growing value of public service pensions led to a significant increase in the estimated public sector pay differential from 1997 to 2009, even though headline pay grew faster in the private sector. From 2009 to 2012, although pay grew faster in the public sector, reforms to public service defined benefit pensions, particularly indexation to the CPI rather than RPI, significantly reduced the public pay differential.

Even over a 75-year horizon, forecasts of PAYGO pension finances are misleadingly optimistic. Infinite horizon forecasts are necessary, but are they possible? We build on earlier stochastic forecasts of the US Social Security trust fund which model key demographic and economic variables as historical time series, and use the fitted models to generate Monte Carlo simulations of future fund performance. Using a 500-year stochastic projection, effectively infinite with discounting, we find a fund balance of −5.15 per cent of payroll, compared to the −3.5 per cent of the 2004 Trustees‘ Report, probably reflecting different mortality projections. Our 95 per cent probability bounds are −10.5 and −1.3 per cent. Such forecasts, which reflect only ‘routine’ uncertainty, have many problems but nonetheless seem worthwhile.

1992 is a staging post on the route to European economic integration. For Britain, the real issues are not national sovereignty versus supranationalism, but the choice between a liberal, market oriented path to integration and a planned, centralised one. The paper assesses these options as they arise in regulatory policies, in industrial strategy, and in the monetary and fiscal policies facing the Community. It recognises that there are major policy areas where the creation of a central authority is essential but concludes that the market route is often the right—and the only feasible—approach.

This is the third article from members of the CLARE Group to appear in the Review. Future articles will normally appear about twice a year. The Review is pleased to give hospitality to the deliberations of the CLARE Group but is not necessarily in agreement with the views expressed. Members of the CLARE Group are M.J. Artis, A.J.C. Britton, W.A. Brown, C.H. Feinstein, C.A.E Goodhart, D.A. Hay, J.A. Kay, R.C.O. Matthews, M.H. Miller, P.M. Oppenheimer, M.V. Posner, W.B. Reddaway, J.R. Sargent, M.F-G. Scott, Z.A. Silberston, J.H.B. Tew, J.S. Vickers, S. Wadhwani.

Britain, like any other open economy, is linked through exports and imports to the movements of prices and production in the world at large. But the emergence of the City of London as a major international financial centre forged an extra link between the fortunes of the British and world economies, which was still very strong in the inter-war period. It is appropriate, therefore, to preface this account of the economic recovery in Britain after the Depression with a brief reminder of the circumstances prevailing in the world economy at that time.

This paper compares the National Institute of Economic and Social Research (NIESR) forecasts for output, inflation and key public sector finance variables against the corresponding forecasts from HM Treasury (HMT), the Bank of England (Bank) and the Institute for Fiscal Studies (IFS). We find that NIESR outperforms, on average, other major bodies in its forecasts for output and in particular inflation where simple scores are used. It also performs well on the forecasting of the government current budget surplus but not public sector net borrowing. Statistical estimates of accuracy provide a less clear picture but their reliability is blighted by the small sample size.

Pupils of religious foundation schools in England show superior educational performance over general (Local Education Authority) schools, the advantage having been estimated in previous studies at learning about a tenth faster for the average pupil by the age of leaving primary schooling (age 11+). In this study access to individual pupils' scores at SAT tests shows that the advantage of religious foundation schools is particularly great for lower-attaining pupils, with only the lowest tenth of those in religious schools attaining the scores of the lowest third in general schools.

This paper considers which currency option would be best for an independent Scotland. We examine three currency options: being part of a sterling currency zone, adopting the euro, or having an independent currency. No currency option is the best when considered against all criteria. Therefore, making the decision requires deciding which criteria are most important. Recent events around the world, particularly in Europe, show that it is essential to consider how an independent Scotland would seek to adjust to adverse economic circumstances. In economists' terms, it is important to think through the ‘off-equilibrium’ adjustment paths of each of the currency options. The amount of public debt, and so the capacity for a fiscal response, is a critical determinant of these paths and therefore of the optimal currency choice. Since commitment to a currency union by an independent country can only be conditional, an independent Scotland might find it optimal to abandon the currency union in the future if the financial stability advantages to having its own currency begin to outweigh any disadvantages due to trade and transactions costs.

What policies and institutions are needed to sustain long-run growth in the UK? We describe an optimistic story of the UK economy over the past 30 years. From the late 1970s, the UK reversed a century of relative decline in terms of per capita GDP with our main counterparts in the US, France and Germany. A key factor behind this improvement was an array of policy changes including an expansion of higher education and greater competition in product and labour markets. However, major weaknesses with respect to long-run investment in human capital, infrastructure and innovation remain. These are hampered by problems of short-termism and policy risk. We propose a series of radical reforms to address these problems: such as more flexibility in schooling with a new focus on disadvantage; a new architecture for national infrastructure decisions and more competition in banking.

Unconventional resources of crude oil and natural gas – shale energy – increased significantly in the US in the early 2000s, triggered by the strong rise in the price of crude oil and technical advances in production. The US is a clear forerunner in the production of shale energy, due to its existing knowledge and infrastructure. The rest of the world is following, although negative environmental effects and other factors have obstructed the diffusion of new extraction methods. In Europe, Polish production is expected to start in the next few years, although environmental concerns are delaying the onset. The rise in the importance of shale energy will increase global oil and gas production markedly. The rising global supplies will improve global energy security in the long run and help to stabilise the large international price differences for natural gas.

The policy debate which preceded the introduction of monetary targets by and large avoided the practical problems of controlling the money supply. Frequently, the impression was given that the money supply is an exogenous policy instrument, subject to exact measurement and precise control. In reality, the money supply is not a label for a rigorously defined single statistic, but a term describing a concept, or rather several distinct concepts, for which numerous different statistical representations have been proposed. The authorities cannot simply exogenise the money supply (on some definition or other); they can only affect it indirectly by influencing the actions of banks and depositors through, for example, the raising of Minimum Lending Rate or the imposition of the corset. In other words, the money supply is not an instrument but an intermediate target, a target which, given existing instruments and the existing institutional setting, is not at all easy to hit.

The Delors report on monetary union in Europe has enlivened the debate on European monetary integration. We would argue that the debate has avoided one of the major issues it should be addressing. There has been very little discussion of the performance of a monetary union when there are external shocks. It is not obvious that a monetary union would cope better with external shocks than would the individual components of the union if they were free to respond. Both exchange-rate and monetary policies can be seen as shock absorbers. Their use can reflect the structural differences between economies, allowing both for differences in comparative advantage that arise from natural endowments such as oil reserves and for differences in wage and price behaviour which, although not immutable, may take some time to remove.

The concept of the Fundamental Equilibrium Exchange Rate (FEER) was first used in Williamson (1983) to calculate the misalignments of the exchange rates for major currencies, and as a basis for his target zone proposal. In this note we use the same concept in a different context, that of the relations amongst the European economies which are members of the ERM, a system which is evolving towards monetary union. The first section reviews the concept of the FEER and its use in policy analysis. The second section relates this to the analysis of real exchange rates and external balance within a potential monetary union. The third section includes new estimates of FEERs using the most recent version of our world model, and considers the possible future evolution of FEERs in the context of EMU, including some tests of the sensitivity of these estimates to parametric change.

The setting and use of targets in the public sector has generated a growing amount of interest in the UK. This has occurred at a time when more analysts and policymakers are grasping the nettle of measuring performance in and of the public sector. We outline a typology of performance indicators and a set of desiderata. We compare the outcome of a performance management system — star ratings for acute hospital trusts in England — with a productivity measure analogous to those used in the analysis of the private sector. We find that the two are almost entirely unrelated. Although this may be the case for entirely proper reasons, it does raise questions as to the appropriateness of such indicators of performance, particularly over the long term.