It is now just over two years since the new framework for monetary policy was announced and operational responsibility for the setting of interest rates was devolved to the independent Monetary Policy Committee (MPC) at the Bank of England. A key component of the new arrangements is their accountability. One of the ways in which this is meant to be achieved is by the ‘open letter’ system, whereby the Governor is to write to the Chancellor whenever inflation is one percentage point higher or lower than the target. It is remarkable that no open letters have yet had to be written.

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)

The short-term prospects for the world economy appear to have brightened since the beginning of this year. Growth has continued at a rapid pace in the North American economies, helped by the prompt monetary response of the Federal Reserve to the turbulence in the global financial and currency markets in the latter half of last year and renewed vigour in equity prices. GDP in the United States is expected to rise by close to 4 per cent for the third year in succession. Some improvement in growth prospects now appears likely in Europe. After the marked slowdown at the turn of the year economic activity in the Euro Area and the UK appears set to return towards trend rates from the second half of this year, helped by relaxed monetary conditions.

In the last few years the stability of the world economy has rested upon a prolonged boom in the USA offsetting recession in Japan and a slowdown in other East Asian ‘tiger’ economies. The risk now has to be faced that, if the ‘bubble’ in the US stock market should burst, recessionary influences would spread throughout the OECD area and beyond; and this could happen at a time when the conventional wisdom has lost faith in the effectiveness of ‘reflationary’ monetary and fiscal policies. After re-examining the case for deploying such policies as a positive response to recession, the authors first ask how the rules guiding monetary policy should be amended to reduce the probability of recession, and to counter it if it develops. They then consider the possibilities for fending off or mitigating recession by use of fiscal measures. They conclude by calling for public discussion of the policy issues involved as a basis for the formulation of contingency plans against the non-negligible risk that the balance of the world economy could before long be tilted in a recessionary direction.

We evaluate the long-run distributional effects of cuts in the public expenditure on education. The article simulates a dynamic model of the earnings distribution. Earnings of individuals differ because of differences in innate ability, and additionally if their education levels differ. We model a dual system of education as in the UK or US, where the state finances public education by taxation. Parents may choose to educate their children privately by spending more. Using parameter values estimated by other researchers for the UK, we evaluate the likely long-run impact of changes to education expenditures. These estimates suggest that the long-run impact of modest changes to public education expenditures on the inequality of earnings are likely to be substantial.

The author examines the relationship between employee involvement (EI) and small firms‘ financial performance using statistical analyses of establishment-level data from the 1990 Workplace Industrial Relations Survey. The author finds EI practices and EI combinations which ‘work’ for small-firm establishments are very different from those that work for large-firm establishments. The least bureaucratic and least costly EI methods have the potential to benefit small firms most. Whether they actually do so depends on the array of other EI and non-EI practices in operation: an inappropriate configuration can have a negative effect on performance. The findings take account of factors associated with being an ‘EI firm’.

This article calculates the equilibrium real exchange rate for the UK economy. The long-run trade and supply side relationships from HM Treasury's model are used to estimate the level of the real exchange rate consistent with the UK economy growing at its ‘natural’ rate while achieving a sustainable current account position. The model shows that the real exchange rate associated with macroeconomic equilibrium lies well below the actual rate for most of the 1990s. This result has important implications for possible UK participation in the single European currency as, once the nominal exchange rate is fixed, overvaluation can only be corrected by holding UK inflation lower than that elsewhere. Achieving this may be costly in terms of jobs and output.

Lou, Abrami, Spence, Poulsen, Chambers, and d'Apollonia (1996) reported the findings from a quantitative review showing generally positive but variable effects of within-class grouping on pupil achievement and other outcomes. Replying in the National Institute Economic Review (July 1998), Prais argued for whole-class teaching claiming that we mis-summarised our findings. In this abbreviated rejoinder, we argue that our findings are: useful; not so variable as to be meaningless; provide evidence of beneficial effects for pupils of all relative abilities; are thorough and detailed; and provide a rather complete picture of the available evidence. In contrast, we believe that Prais (1998) has relied too heavily on conjecture and selective citation to offer a view of within-class grouping which is a serious mis-summarisation of the findings.

Let us briefly remind ourselves of the current policy-context of this issue in Britain. The need to raise children's schooling attainments to a very substantial extent has become widely accepted in the past fifteen years following international comparisons (many based on research at this Institute) of workforce vocational qualifications and school-leaving standards. The consequences are expressed today in interventionist public policy in terms of a National Curriculum laid down for all school-ages (adopted ten years ago), together with more recent detailed syllabuses in the core subjects of language and mathematics embodied in the National Literacy and Numeracy Strategies for primary schools (adopted in the past two years). Much of the need for such reforms in Britain can be traced to worries as to whether teaching time was well spent, particularly in primary schools using ‘modern’ teaching methods which required children within each classroom to be divided into small groups, each group sitting around its own small table, many children not facing the wall-board (many classrooms even having their wall-board removed) so as to promote less ‘didactic’ teaching and more ‘discovery’ learning by pupils. The frequently ensuing difficulties of teachers in dividing their time effectively among those groups, the consequential frustration of those children who awaited the teacher's attention, the slower general pace of learning, and the particular disadvantages suffered by slower-developing children, need not be spelled out here; they have been closely examined in research involving timed classroom observation, such as the ‘Oracle’ project of Professor Maurice Galton and his colleagues.