In recent weeks, equity markets have been very weak and the euro exchange rate has risen by more than 10 per cent against the dollar. The UK's effective exchange rate has also depreciated, removing some, but not all, of the overvaluation we identified in the April Review. We report on recent movements in table 1, and their implications are discussed in the UK and World forecast chapters in this Review. To an extent the movements in the US stock markets and the exchange rate are linked, but there does seem to be some ‘excess strength’ in the euro, which will in turn contribute to the weakness of Euro Area equity prices.

This paper studies the relationship between sickness absence and spousal retirement. Swedish panel data have been used to estimate the effects of both old-age retirement and disability retirement on average sickness absence during 1996 to 2001 for men and women. Spousal old-age retirement significantly increases female average long-term sickness absence by approximately one week per year, while spousal disability retirement yields a significant increase in average sickness absence for men by approximately one week and for women by approximately two weeks per year.

In this note we discuss the behaviour and determinants of UK imports of manufactured goods, focusing particularly on the period since the end of 1979. The behaviour of imports has important short and long-run implications for the rest of the economy. Attention is frequently focused on imports of manufactured goods and the UK's worsening net trade position in such goods, which has moved from a surplus of about 22 billion in 1982 to a deficit of around £4 billion (or a balance of payments basis) in 1984. One of the outstanding features of import behaviour is the persistent upward trend in the ratio of manufactured imports to ‘final demand’ (chart 1). We hope to throw some light on whether this long-term trend is due merely to increased international specialisation in production and lower tariff barriers or is indicative of an endemic weakness of the UK manufacturing sector in terms of non-price competitiveness.

The Coalition's record on working age social security is reviewed under the headings of continuity (with the policies of the previous government), retrenchment and reform. Under continuity, the Coalition's decision to proceed with the previous government's planned reassessment of incapacity benefit claims was a notable policy mistake which led to the near-collapse of the assessment system by 2014. Retrenchment measures are dominated by benefit uprating changes which, along with measures targeting higher-income groups, have been less regressive than alternative approaches to expenditure reduction. However these changes were accompanied by a number of smaller-scale retrenchment measures, with substantial cumulative impacts on income. Retrenchment has thus been less regressive than it might have been but more regressive than it needed to be, taking the retrenchment targets as given. Policy failure and exogenous economic factors have offset the effect of retrenchment measures, with the result that expenditure by 2014/15 was little different to that planned in the Labour government's last budget. Full implementation of major reforms has been deferred to the next parliament. The main achieved policy change has been an unprecedented tightening of the benefit sanctions regime.

In this article, Mr. I. M. D. Little, who recently returned from India, gives his view of the problems of India on the eve of the Third Five-year Plan. Mr. Little is a Fellow of Nuffield College, Oxford. He was in India for a year as a member of the team sent by the Massachusetts Institute of Technology's Centre for International Studies. His main conclusions are given on page 29.

I summarise new facts on hours worked differences across countries and their driving forces. The facts are derived from a comprehensive analysis of micro data sets. First, hours worked are substantially higher in poor than in rich countries. Second, lower hours worked in Europe than in the US can partly be explained by differences in vacation weeks and partly by differences in the demographic structure. Moreover, employment rates tend to be higher and weekly hours worked lower in Western Europe and Scandinavia than in the US, with the opposite being true in Eastern and Southern Europe. Last, among core-aged individuals, married women form the group that exhibits the largest differences in hours worked across countries. International differences in taxation, and especially in the tax treatment of married couples, are an important driver of these differences.

Expenditure-side and income-side gross domestic product (GDP) are measured at the quarterly frequency and contain measurement error. Econometric methods exist for producing reconciled estimates of underlying true GDP from these noisy estimates. Recently, the authors of this paper developed a mixed-frequency reconciliation model which produces monthly estimates of true GDP. In the present paper, we investigate whether this model continues to work well in the face of the extreme observations that occurred during the pandemic year and consider several extensions of it. These include stochastic volatility and error distributions that are fat-tailed or explicitly allow for outliers.

This paper examines the outcomes for changes introduced by the UK Coalition government in 2010. The Office for Budget Responsibility (OBR) is generally regarded as a success, and should become a permanent part of fiscal policymaking. The form of the primary fiscal mandate, involving a five-year rolling target, appears to be a sensible way to shape fiscal decisions when monetary policy is able to stabilise the economy. Unfortunately it was introduced, along with a five-year programme of severe fiscal consolidation (austerity), while the economy was in a liquidity trap. The OBR estimates austerity reduced GDP growth by 1 per cent in both 2010–11 and 2011–12, and monetary policy was unable to offset this. For the Liberal Democrats a misreading of the Eurozone crisis may have been responsible for this mistake, but for the Conservatives this mistake appears to derive from an unconventional view that the liquidity trap is unimportant.

This paper uses the IMF's macroeconomic model MULTIMOD to examine the implications of the zero interest rate floor (ZIF) for the design of monetary policy in Japan. Similar to findings in other studies, targeting rates of inflation lower than 2.0 per cent significantly increases the likelihood of the ZIF becoming binding. Systematic monetary policy strategies that respond strongly to stabilise output and inflation, or that incorporate some explicit price-level component, can help to mitigate the implications of the ZIF.

This paper analyses Labour's record on monetary policy and the record of the MPC which it created. The paper begins by discussing the conceptual framework and institutions behind inflation targeting as it operates in the UK. We then discuss the successes that it enjoyed up to 2007 and debate the lessons that are being learned as a consequence of the experience since then. We then raise some of the formidable challenges that UK monetary policy must now face up to including maintaining the credibility of the inflation targeting regime in the face of greater interdependence between monetary and fiscal policy, and between monetary policy and support to the banking system and financial markets.

The forecast published in this Review uses the latest vintage of the Institute's domestic econometric model, version 11.4. In comparison with the model described a year ago (Model 11.1, see Wren-Lewis, (1988)) some of the main developments are:

1) The key price and wage equations are both forward looking, and are based on explicit dynamic theories of adjustment. This is perhaps the first time that a large quarterly econometric model has attempted to identify the structural characteristics of nominal inertia in the UK.

There are new monetary and fiscal frameworks in place for the countries in the Euro Area. The European Central Bank has a remit to maintain price level stability in the medium term, and it has developed a two pillar strategy, with interest rates being set in relation to a reference value of M3 and general (inflationary) conditions. We discuss an ideal type representation of this framework and examine the potential effects of a fall in the euro. Fiscal policy in Europe is now based on guidelines from the Stability and Growth Pact and we discuss the role of commitment in this framework as well

This paper develops a new approach for investigating the determinant of the mark-up of prices over costs. We estimate basic price equations around an expression for marginal cost that is derived from a cost minimisation problem, using a vector error correction approach to avoid endogeneity bias. Observed basic prices include the mark-up over marginal costs, and this mark-up is of interest to policymakers as an indicator of competition and ultimately as a determinant of the level of equilibrium employment. We look at the factors driving this mark-up, and in particular look at the role of EMU, as well as globalisation, the European Single Market and openness to trade and the introduction of the euro. We use a panel data set that includes both EMU and non-EMU members. The results indicate an important role for trade liberalisation in determining the mark-up, but openness itself and the introduction of the euro do not appear to have a significant role.

Transfer spending among English Premier League clubs has increased drastically since the inception of the league, often funded by extremely wealthy owners who began purchasing majority stakes in clubs. Using data from the Deloitte Annual Review of Football Finance, we allow for different tiers of football clubs representing the haves and the have nots as well as a comparison between the first and second decades of the Premier League. Our finding that heightened spending has improved on-field performance only at the expense of hurting profitability is in line with win maximisation surmounting profit maximisation in today's Premier League.

After the publication of the Government’s ‘Levelling Up’ White Paper, this paper reviews the role of institutions and governance structures across English regions in tackling spatial inequality and low productivity. It considers the recent history and changing roles of local and regional organisations and the overarching policy frameworks that oversee them as a key element of tackling spatial inequality and low productivity. Specifically, the paper looks at the frequent changes to institutional arrangements supporting economic development and the process of allocating competitive funds to local and regional bodies.

Discussion of the UK's housing crisis is of long date, and tends to focus on a simple story about a mismatch in housing supply and demand and the consequent need to build more homes. Yet the reality is more complex with multiple sub-plots including social housing, stress in the private rented sector, benefits, subsidies and ultimately taxation of home ownership.

At the bottom of the market, the crisis is real and acute, as manifested in a sharp increase in homelessness and rough sleeping. The inescapable answer is to increase the depleted stock of social housing and widen eligibility criteria. An increase of 100,000 social units a year in England would help address this problem, as well as alleviate the financial squeeze on tenants of the private rented sector, whose number has grown sharply in the past 15 years in tandem with a steep rise in the housing benefit bill. Recent efforts to curb housing benefit have further increased distress, so it will be necessary to consider increasing benefits again alongside regulatory interventions with private landlords.

In the home ownership market, recent government intervention has taken the form of the much-criticised Help-to-Buy Equity Loan scheme. This market policy to support new-build homes should be wound down and replaced by a scheme to endow all young people with a capital sum that they could use for second-hand homes as well. More generally, a more sophisticated approach to planning home-building is needed, both for assessing overall numbers and their regional distribution and in financing the supporting infrastructure.

But none of these measures is a panacea for a housing crisis that is in large part a symptom of problems in the wider economy, such as low relative wages for young people, a lack of clarity about environmental issues, and failing places. A successful policy package to address the distorted structure of the housing market must also grasp the most difficult nettle of all – namely the way the tax benefits of owner-occupation incentivise overconsumption of housing and a widening wealth gap between renters and home owners, and between owners in different parts of the country. If we spend more to help those who struggle to afford decent housing, then it is only just to raise more taxation from those who benefit from restrictions on housing supply – whether through reform to council tax, a wider wealth tax or a limited form of Capital Gains Tax on principal residences.

Government post-Brexit will face sustained and difficult challenges as the UK adjusts to its new situation. Yet these challenges risk being exacerbated by fundamental changes in UK political debate that are affecting the perceived legitimacy and effectiveness of the system and structures of government. These include erosion of the clear distinction entrenched for the last 150 years between political choices by elected representatives and impartial administration by the civil service; the disruption of traditional deliberative processes by digital and social media; and increased centralisation of decision-making in No. 10 Downing Street combined with inadequate scrutiny of that decision-making either by the Cabinet or by Parliament.

The centralisation of executive power reduces its perceived legitimacy across the UK, with devolved government in Scotland and Wales seen as contingent on the Westminster Parliament and Northern Ireland under control by central government. Fiscally, the UK has become the most centralised democratic country in the world. As government faces up to the challenge of unwinding membership of the legal and regulatory framework developed during 45 years of EU membership, it is vital that the UK's political structures restore their legitimacy and efficiency.

Necessary reforms start with greater transparency about how government really works today. A PM's Department should be created, separate from the Cabinet Office; senior appointments including the Chief of Staff and ‘Advisors’, as well as instructions from No. 10 to departments, should be subject to effective Parliamentary scrutiny. Legally entrenched structures are required to confirm that devolved powers cannot simply be overridden by the Westminster Parliament. Greater fiscal autonomy should be guaranteed to local government.

Finally, politicians should choose either to recommit explicitly to the original system whereby the civil service remains separate from politics and take steps to make it effective; or acknowledge the drift towards greater political control of the civil service and introduce safeguards to minimise political abuse, for example by taking steps to increase scrutiny of appointments and expenditure.