Three new commodity price indices have been compiled by the National Institute and appear in table 20 of the Statistical Appendix (page 50). Their purpose is to give an early (but necessarily rough) indication of current price movements in three trade flows:

1. (a) in United Kingdom imports, with sub-indices for food and tobacco, industrial materials and fuel,

2. (b) in the exports of the overseas sterling area,

3. (c) in the exports of primary producing countries in total.

With the uncertainty induced by the prolonged run-up to the general election having come to an end and renewed signs that consumer and business sentiment has begun to improve, it now seems as if the economy is poised to emerge from the recession over the coming months. It may be some while before the evidence of any improvement emerges from the official statistics and it is quite possible that the various monthly sectoral and industrial surveys will continue to give conflicting signals as to the strength of the economy at the present time.

Prospects for the world economy now appear bleaker than they have for more than five years, with the growth of output and trade having begun to slow in all regions. GDP growth in the OECD area is expected to slow particularly strongly this year. During the emerging markets crises of 1997 and 1998 the downturn in the world economy was driven by events outside the major industrialised economies, and a combination of the automatic stabilisers of the market mechanism and the prompt action of the monetary authorities ensured that the phase of strong growth was not interrupted. The current conjuncture is different, in that the origins of the slowdown appear to be within the OECD region, and they are difficult to offset with policy and hard for market-based stabilisers to absorb. The slowdown in production, trade and investment in information technology related industries is at the core of the problems facing policy makers, and their tools are not well adapted for dealing with cycles driven by specific industries.

This article examines from two angles changes in the competitiveness of United Kingdom exports since devaluation. First, it considers both in total and in some area and commodity detail recent changes in the United Kingdom's share of world trade in manufactures, particularly between the periods October 1966/September 1967 and October 1967/September 1968, and compares them with previous changes over the whole period from the mid-1950s. Secondly, it gives the results of some special inquiries conducted at the end of last year among business firms in Australia, New Zealand, and South Africa and earlier (and on a smaller scale) in West Germany.

Three projections have been published in the last two years which give figures for the possible pattern of industrial production which might accompany certain growth-rates of total national output between 1964 and 1970, or 1964 and 1975. One of the problems in calculations of this kind is to find a sensible way of projecting the output of industries like the chemicals industry, which mainly supply other industries rather than the final consumer, and whose products have been gaining at the expense of traditional materials : the input of chemicals, per unit of output of the user industries, has been tending to rise.

In interesting times several things may happen simultaneously, and they may have connected roots. The financial turmoil that developed initially in the US banking sector had its roots in financial innovation that had made available cheap finance and increased demand for housing. This wave of low cost finance had spread to Europe, and house prices rose in a correlated way. The increase in demand in the world economy that resulted from strong growth in lending and high asset values helped raise output growth outside the OECD, and this in turn put upward pressure on oil prices. Markets sometimes work slowly, and the effects of the increase in demand on prices appear to be coming through just as the asset bubble is collapsing. The sequence of events was not inevitable, as low personal sector saving in the US and the UK as well as elsewhere could have been offset by tighter fiscal policy, and better prudential regulation of lenders would also definitely have helped. The desire to move financial regulation from the central bank, as in the UK, may have been for good, competition based, reasons, but it has meant that financial sector oversight has not taken account of the macroeconomic implications of a wave of lending that rested on risky financial innovation and therefore it has not properly addressed the issue of systemic risk (see Barrell and Davis, 2005). The resulting financial turmoil has meant that banks have made losses, and have been unable to trust each other's solvency when making deals. As a result three month interbank rates have risen well above central bank intervention rates, as can be seen in figure 1.

This article is one of a series describing attempts made at the National Institute to develop formal methods of preparing short-run forecasts of United Kingdom exports. The first article was concerned with British exports of manufactures to industrial countries and the second with exports to primary producers.

The pattern of real exchange rates has changed significantly since February. Our currency forecasts at that time were in line with the implied forward rates in financial markets, with the yen projected to appreciate slowly against the dollar, rising from 100 to the dollar in the first quarter of 1995 to around 90 to the dollar in 1997. Within Europe, we projected a further small appreciation of the D-mark and a continuing depreciation of the lira and the peseta. Overall, we expected ‘real exchange rates to stay approximately stable’. In the event, the yen rose strongly in March and April to around 80 to the dollar, while the D-mark rose from around 1.50 to 1.38 to the dollar. At the same time, the lira/D-mark exchange rate fell by over 10 per cent and the Exchange Rate Mechanism was placed under renewed strain, with both the peseta and the escudo being devalued. As a result, the Japanese and US real effective exchange rates are respectively 15 per cent higher and 7 per cent lower than we had previously expected. These developments also had a wider impact on financial markets. The discount rate was cut in Japan and Germany and long-term rates rose in Italy and Spain. Equity prices fell sharply in those countries with appreciating currencies and jumped up in most of the countries whose exchange rate has depreciated.

Problems arising in the US economy and financial system are frequently of global significance, and the inauguration of a new President provides a convenient occasion for taking stock of the US economy's recent performance and prospects. In this article we include some tonger-term background as well as an assessment of the current situation. The article is a sequel to one which we wrote nearly four years ago and which focused mainly on the remarkable recovery from recession achieved by the US economy in the period 1982-4.

The public sector finances have been transformed in recent years as tight expenditure control has been combined with buoyant revenue. In the last fiscal year, the overall budget was in surplus by almost £6 billion. Official estimates indicate that the current balance was in surplus by £10 billion, thus comfortably meeting the Golden Rule.(1)

We investigate trends in regional cost competitiveness in China's four regions (Coastal, Northeast, Interior and West) over the past thirty-five years. We find that the Coastal region lost its initial cost competitiveness as its higher relative labour productivity (RLP) was offset by rapidly rising relative nominal labour costs (RNLC) due to rising wages. The Northeastern region still has cost advantages in the traditional Manufacturing sector. The Interior and West regions improved their competitiveness in most industries due to low RNLCs. There is convergence of relative unit labour cost (RULC) in all industries before 1995, but only in Finance after 1995. However there is convergence in RLP in five industries in 1978–95 and 1995–2009, offering prospects for robust growth for China into the future.

Macro Modelling Notes is a new section of the Review, which we hope will appear on a regular basis. It will contain a small number of very short papers that have arisen from applied macro modelling work at the Institute or elsewhere. In the course of building and operating macro models, a large amount of information is used and produced that may never enter the public domain. This may be because the information is not substantial enough to justify a whole journal article, or because it is specific to the practice of using a macro econometric model. However this information is often of general interest to other economists, and is nearly always helpful to other macro modellers. This section is designed as an outlet for information of this kind, which might otherwise not be published in any readily accessible form.

The three notes below provide three different examples of this type of note. The first involves econometric practice, and shows how long-run standard errors can be simply derived using standard regression techniques. The second presents some econometric results on export pricing obtained during normal ‘model maintenance’ of our world model GEM. The third considers the problem of setting terminal dates for a consistent expectations model.

This new section of the Review is designed as a vehicle for all UK and overseas macro modellers, and therefore outside submissions are strongly encouraged. Submissions must be of about the length of the notes shown here, and contain relevant material that does not form part of a larger article soon to be published. Unlike Review articles, these notes will not normally be refereed, but the Editorial Board may consult expert advice when necessary.

This time last year we published in the Review an article comparing macroeconomic policy in Britain and France. That article and the present one are both based on a three-year project in which we compare events and policies in Britain with those in the other major European countries.

In this article we propose a policy framework for inflation targeting that contains elements of both optimal and simple rules. We use a simple feedback rule for the interest rate to look after monetary policy in the long run whilst using optimal control in the short run to determine appropriate responses to shocks. The composite policy is capable of substantial welfare improvements over using a simple rule alone whilst maintaining tractability. We see the use of such a framework together with a fully specified model as a feasible approach to practical policy design.

The NIESR has been for 25 years at the centre of the British macroeconomic policy debate. This seems to be a good occasion to look back critically over that debate and the NIESR's role in it. That role it has always taken very seriously, even though it has often involved painstaking exposition to non-economists of well known economic issues. In this it has continued a tradition actively followed by Keynes, of policy commitment and persuasion as well as the pursuit of research and its dispassionate dissemination. This tradition is frowned on across the Atlantic; there ‘scholars’ are not encouraged to dirty their hands with policy, at least until retirement. So be it; here our society expects greater involvement by its scholars, and he that pays the piper must call the tune.