…though it helps.
I never imagined that a government in an advanced economy would adopt more stupid policies than those implemented by the Trump administration. Consider my correction at this point – for example, the UK in 2022.
from Reuters yesterday:
“We are closely monitoring recent economic developments in the UK and engaging with the authorities,” an IMF spokesman said in response to a Reuters inquiry after heightened market concerns sent the pound to a record low.
“Given rising inflationary pressures in many countries, including the UK, we do not recommend a large and untargeted fiscal programme at this juncture, as it is important that fiscal policy does not run counter to monetary policy,” the spokesman told the International Monetary Fund. organization’s report. The public’s first reaction.
I do see a lot of people comparing the UK to emerging market economies. This is not an appropriate comparison for many reasons.
- The UK government borrows mainly in its own currency
- The currency is floating and therefore less susceptible to a “run” in the traditional sense
- There is no problem with the government’s ability to get the tax revenue it wants (unlike some countries with underdeveloped tax capacity). So it’s a matter of will, not money.
On the other hand, there is no doubt that there is a lack of confidence in the government’s ability to stabilize the economy, so the debt-to-GDP ratio raises the premium on government debt and reduces the desirability of sterling assets.
In addition, a sharp depreciation of the currency will lead to inflationary pressures. Here, the trade-weighted value of GBP is more important than the USD/GBP exchange rate.
resource: Bank of England, GBP Indexaccessed 28 September 2022.
Trade-weighted losses over the past week have been around 3% (compared to 4.3% for USD/GBP). On the other hand, even on a trade-weighted basis, the pound has fallen 8% since Boris Johnson announced his resignation on July 7.Given that the exchange rate passed to the CPI is about 0.13 (from Forbes et al. Jay 2018), we get a 1% cumulative rise in the CPI level.
Comments by Adam Posen, Head of Peterson IIE here.
