Amit Patel December 13, 2009 Professor Steven Husted On the Economy of the United Kingdom I: Introduction The

United Kingdom consists of the four countries Wales, England, Scotland, and Northern Ireland (Countries within a Country). Though each country operates with various degrees of independence, the Bank of England is the reigning monetary authority in all four countries. Furthermore, the United Kingdom government implements fiscal policy affecting all four countries. Section I discusses various measures of the economic performance of the United Kingdom and the efficacy of its economic policies from 1990 through 2008. Throughout the same period, the various pieces of the United Kingdoms balance of payments have undergone changes that reflect the impact of international trade on its economy. Though the United Kingdom is a net importer of goods and has been one throughout the 1990 through 2008 period, it has also been a net exporter of services throughout the same period. Section II delves into these and several other details of the balance of payments of the United Kingdom. Regarding the pound, the United Kingdom has had a floating exchange rate throughout most of the same period, with the exception occurring during its short-lived attempt at fixing rates within the 1990 to 1992 period. Section III provides an analysis of the exchange rate movements of the pound.

Furthermore, the United Kingdoms economy is currently suffering a recession from the effects of the global financial crisis that began in 2007. Section IV elaborates on the both the effects of and the policy responses to the current recession. II: The Economic Performance of the United Kingdom Fiscal policy, as of the Finance Act 1998, centers on supporting monetary policy by maintaining a golden rule and a sustainable investment rule. The golden rule states, Over the economic cycle, the Government would borrow only to invest and not to fund current spending. The investment rule states, public sector net debt as a proportion of GDP would be held over the economic cycle at a stable and prudent level. Other things being equal, net debt would be maintained below 40 per cent of GDP over the economic cycle (Fiscal Policy). Fiscal policy has achieved its goal of adhering to these two rules in the economic cycle from 1997-1998 to 2006-2007 (Fiscal Policy). However, it should be noted that this is only true because the Treasury revised the beginning of the economic cycle from 1999 back to 1997 (FactCheck). It is apparent in Table C that the beginning of the new cycle has been characterized by a 54.7 billion government deficit, larger than any within the last ten years. The deficit spending has resulted in a government debt that was at 52.0% of GDP as of December 2008 (UK Government Debt). This implies that there is lots of government borrowing going on that will have to be paid down in later years of the economic cycle either by public sector cost cutting or increased taxes. Over the time horizon spanning from 1990 through 2008, the proportions of the main components of GDP have remained remarkably stable, as is evident in Figure A (net exports have been excluded because they are relatively compared to the other

components of GDP). From Table A, each components average share of GDP from 1990 to 2008 can be calculated. Household consumption has accounted for 64.5% of GDP on average over the course of the period. Investment expenditures have accounted for 17.4% of GDP on average, and government spending has averaged 20.1% of GDP. The fact that the proportions of each component have remained stable means that those three components have grown at approximately the same rate over the years from 1990 through 2008. However, though net exports are small compared to the other components of GDP, it is noteworthy that imports have increased more quickly than exports over the time period. In fact, there has not been a single year since 1997 during which the United Kingdom was a net exporter; moreover, net imports have steadily increased over the decade spanning 1998 through 2008. As of 2005, the United Kingdom became a net importer of energy, a driver of import growth throughout the period (The World Factbook).

Figure A:

However, GDP growth itself has not been so stable. Figure B shows that after the recession of the early nineties, the real GDP growth rate peaked around 4% and then fluctuated throughout the past two decades, until it fell to a new low of .7% in 2008. The slowdown in growth in 2008 was due to global economic slowdown, tight credit, and falling home prices[that] pushed Britain back into recession in the latter half of 2008. Up until the recession hit in 2008, from 1992 onwards the United Kingdom experienced its longest period of economic growth in recorded history (The World Factbook). As far as per capita GDP is concerned, growth has occurred at a pace slightly less than real GDP growth in each year. Population growth over the period has occurred at a rate of about .4% (can be calculated from Table B), which is much slower than the real GDP growth rate over the same period. This means that a tiny fraction of real GDP growth is due to population growth. Furthermore, though per capita GDP is a dubious indicator of standard of living across the population (because it does not take into account income distribution), the per capita GDP growth over the period most likely indicates an increase in the standard of living in the United Kingdom since per capita GDP growth is highly correlated with an increase in the standard of living (OSullivan and Sheffrin 57). Figure B:

The consistent real GDP growth in the United Kingdom has coincided with a largely consistent decline in the unemployment rate over the period spanning from 1993 (after the early nineties recession) to 2004, as can be seen in Figure C. The consistent decrease in the unemployment rate was one of the policy goals of former Prime Minister Tony Blair and former Chancellor of the Exchequer Gordon Brown (currently Prime Minister) in the years leading up to 2000. To be more clear, their goal was to have full employment in the sense that each person seeking a job could find one. This was truly an ambitious goal since, though in aggregate the unemployment rate was historically low (below the mean of 7.7% over the 1993-2008 period) and decreasing throughout the United Kingdom, there were individual pockets of high unemployment as late as year 2000, like 22% unemployment in parts of Birmingham (Analysis: Low Unemployment).

Figure C:

An important thing to note is where all of the new job growth that was outpacing labor force growth was coming from. Manufacturing jobs have been decreasing over this time period while the services sector has been providing more and more jobs (Analysis: Low Unemployment).1 Moreover, over the period spanning from 1995 to 2005, managerial jobs grew by 12.73%, professionals by 8.13% and associate professional jobs (such as nurses and technicians) by 16.98% (Loney). Interestingly, as is clear in Figure C, a consistently decreasing unemployment rate and growing real GDP were not accompanied with high rates of inflation as might

Even in terms of GDP share, industry has been steadily declining while services (in particular financial and business services) form the largest portion of GDP (The World Factbook).
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have been expected. Some economists believed that increasing labor productivity (because of technology) and an increasing labor force kept labor costs from rising, thereby stifling inflation. This reasoning makes sense according to the Aggregate Supply and Aggregate Demand model, since an increase in labor supply drives down factor costs, increases aggregate supply and thereby the full employment level of output; the rise in aggregate supply counteracts the inflationary effects of increasing aggregate demand (which equals real GDP). There was also debate as to whether the low inflation and decreasing unemployment status quo could be maintained though, as is apparent in Figure C, time has indicated that it could not and that inflation rose along with the unemployment rate in the later years of the 1990 to 2008 time period (Analysis: Low Unemployment). Though over the 1990-2008 period the unemployment rate has had a generally decreasing trend, it did increase slightly in 2002 and 2004 and then sharply in 2006 from 4.8% to 5.4%. Furthermore, after 2004 there has been an increasing trend in unemployment rate. There are several factors that can explain the 2006 unemployment rate spike, including the lagged impact of the 2005 economic slowdown (characterized by a per capita real GDP growth rate under two percent), an influx of workers from the European Union, and more working-age participation in the labor force (up from 78.7% to 79.0% from December 2005 to December 2006) (Scottish Economic Report). With regards to inflation, the CPI has increased at an annualized rate of 3.0% from 1990 through 2008. Nominal GDP has grown at an annualized rate of 5.3%, while real GDP has grown at an annualized rate of 2.44% over the same period. In the early nineties, the inflation rate was as high as 6% while real GDP growth was negative,

indicating that the United Kingdom was suffering from cost-push inflation. After real GDP growth resumed in 1992, the inflation rate oscillated between two and three percent until 2003 when the growth rate stabilized around three percent and then increased to four percent in 2007.2 Increases in domestic energy costs and weather-induced food price increases caused higher than target inflation in 2007 (Letter to Gordon Brown). Also, large increases in food and energy prices accounted for about 3.3% of CPI inflation when it reached its high in September 2008, accounting for the higher than target inflation in 2008. Furthermore, even though the economy slipped into recession in the second half of 2008, driving CPI inflation down 1.1%, Figure C shows that CPI inflation remained near four percent for the year overall. The fact that prices of other goods and services rose around two percent, or at the target rate, affirms the notion that food and energy prices drove CPI inflation (Letter to Alistair Darling). The recession that began in the second half of 2008 is characterized by falling price levels, which could result in inflation undershooting the target of two percent in the medium term. Since the goal of the Bank of England is to maintain the target inflation rate, the MPC decided to cut the official bank rate all the way down to two percent as of December 4, 2008 (Monetary Policy Committee Decisions). This action makes sense following the Quantitative Theory of Money; since, holding output constant, if money velocity is slowing then increasing money supply by decreasing the interest rate should

In May 1997, the Bank of England was given operational independence in terms of monetary policy. In the 1998 Bank of England Act, the job of maintaining price level stability in the medium term and a target inflation rate of two percent was given the Monetary Policy Committee (MPC) of the Bank of England, the central bank of the United Kingdom. If the inflation rate deviates by more than one percent in either direction from the target rate, the MPC must write an open letter to the Chancellor of the Exchequer explaining why (History).

prop up the price level. However, if money velocity continues to decrease, there is only so far the bank rate can be decreased. Money supply growth could also partially explain the high inflation in the last few years of the period. Fueled in part by historically low nominal interest rates (the money market rate was well below the 6.3% average over the period calculated from Table B in the last nine years), money supply, in particular M4, has grown at a rate of higher than ten percent per annum starting in 2005, which is higher than at any other point in time over the 1990 through 2008 period (see Figure D).3 This coincides with the 2005 to 2008 period over which the CPI has increased by more than three percent annually (see Figure C). Furthermore, although money supply growth was historically high at 12.6% in 2005, well over the 8.2% average of the period, the Bank of England did not begin to significantly ratchet up the official bank rate until August 2006 (Monetary Policy Committee Decisions). Some economists have attributed the inflation rate being higher than three percent to this failure (Shaikh). Figure D:

The Bank of England maintains two measures of money supply: M0 and M4. M0 is how many sterling notes and coin is in circulation outside of the Bank of England, including that held by member banks (Explanatory Notes M0). M4 is how much the private sector (except monetary financial institutions) is holding as sterling notes and coin, deposits, bonds and other interest rate derivatives with maturities less than five years (Explanatory Notes M4).

The economy of the United Kingdom has been characterized largely by steady growth, controlled inflation, and a dropping unemployment rate over the 1990 to 2008 timeframe. Though in the early part of the time period the economy was in recession, it came out and grew steadily until 2008, when the global financial crisis hit. III: The Balance of Payments of the United Kingdom Furthermore, the difference between services exported and services imported has grown from $5.3 billion to $83.2 billion from 1990 through 2008, as can be seen in Table D. The United Kingdom has also consistently had positive net income from abroad throughout the time period. Therefore, although the United Kingdom has been experiencing a current account deficit throughout the time period, this is primarily driven by a large trade deficit and not due to lots of service imports or income payments to foreigners.

In the United Kingdom, net direct investment over the 1990 through 2008 period experienced two large oscillations: one in the 1998 through 2000 and the other in the 2005 through 2006 time period. From 1998 through 2000, net direct investment dropped primarily as a result of a rise in direct investment abroad and fell to its lowest level of -$124.1 billion according to Table D. From 2005 through 2006, net direct investment rose mostly because of a large increase in direct investment into the United Kingdom, peaking at $96.6 billion. Interestingly, throughout the 1990 through 2008 period, net direct investment was only positive in 1990, 2005, and 2006, meaning that in every other year there was more investment from the United Kingdom into other countries than there was investment from foreign countries into the United Kingdom. Furthermore, trends in the current account balance have shifted at various times over the period spanning from 1990 through 2008, which can be seen in Figure E. In particular, the current account deficit was shrinking from 1990 through 1997, when it reached its lowest point over the whole 1990 through 2008 period of $1.403 billion. From 1998 through 2006, the current account deficit grew to its peak over the whole 1990 through 2008 period of $80.881 billion. Starting in 2007, the trend reversed once again, and the current account deficit shrank from 2007 to 2008. From Figure F it is apparent that the current account deficit to nominal GDP ratio reached its peak of 6.8% in 1990, and its lowest point of .2% in 1997, following the same trends as the current account balance itself over the 1990 through 2008 period. It is also noteworthy that the current account balance was not once positive throughout the 1990 to 2008 period in the United Kingdom, indicating that it has been accumulating debt to foreigners throughout the period. Since the United Kingdoms net foreign liabilities were 24.34

billion, a negative current account balance throughout the whole period would indicate that the United Kingdom has been a net debtor country from 1990 through 2008. However as is evident in Table D, as of the end of 2008, the United Kingdoms foreign assets exceed its foreign liabilities, making its net foreign assets 135.5 billion (making the United Kingdom a net lender). 2008 was the first year during which the United Kingdom was a net lender since 1994. The reason for the divergence of the net foreign assets figure from what would be expected from the current account balance numbers is that net foreign assets reflect changes from valuation effects. Figure E:

Figure F:

Changes in exchange rates can explain some of the changes in current account balance. According to the elasticities model, appreciation in the home currency should result in the reduction of a current account surplus or an increase in a current account deficit, and, similarly, depreciation in the home currency should lead to an increase in a current account surplus or a decrease in a current account deficit. Figure G can be used to see how effective the elasticities model is in the case of the United Kingdom with respect to price. Figure G has been plotted with a two year lag in the REER to account for the J-curve effect (which states that in the short run the current account balance may worsen due to the lagging effect of price changes). In other words, when the year axis shows 1992, the inverse REER value is from 1990, and it is expected that the graphs of the inverse of REER and the current account balance move together. Figure G has also been plotted with the inverse of the REER so that an appreciation in

pounds corresponds with a dip in the graph in order to trace the movement of the current account balance in response to exchange rate changes more easily. It is clear from Figure G that the elasticities model appears to hold in the case of the United Kingdom for the period 1990 through 1998 (ignoring small fluctuations in the exchange rate). In particular, the steep appreciation of the pound (corresponding to a dip in the graph of the inverse of REER) in 1997 appears to have caused an increase in the current account deficit in 1999. After 1998, though the exchange rate remained largely unchanged until 2008, the current account deficit climbed until it peaked in 2006 and began to shrink thereafter, meaning that there must have been some other variables driving the current account deficit higher, since the elasticities model would predict that the current account balance should have stayed about the same over the period spanning from 2001 to 2007. Figure G:

With regards to the income effect on the current account balance, according to the elasticities model, if income growth in a country outpaces income growth in the countries it trades with, its demand for goods and services will be rising faster than that in the other countries, so the country with the faster growth will import more. Increasing imports will lead to an increase in the current account balance. In the case of the United Kingdom, it is useful to compare its income (GDP) growth rate to that of the euro area, since over half of its import and export activities are done with the euro area countries (Export and Import Trade). Comparing Figure G to Figure H, it becomes apparent that over the 2001 through 2005 period during which the United Kingdom experienced a higher GDP growth rate than the euro area, the faster income growth in the United Kingdom could have driven the escalation in the current account deficit from

2003 to 2006. Furthermore, the convergence of the growth rates from 2006 to 2008 could explain the decrease in the current account deficit over the same time period. It should be noted that the euro area is far from a perfect economic entity to use as the complementary economy in the elasticities model application to the United Kingdom, since not all of the international trade from the United Kingdom is done with the euro area countries, and the proportion of the United Kingdoms international trade being with the euro area countries is most assuredly not constant. Figure H:

That the United Kingdom has run a current account deficit over the entire period from 1990 through 2008 means that the level of national saving has been less than the level of investment expenditures. According to the intertemporal model, this is

indicative of a world interest rate that is lower than the equilibrium rate for the United Kingdom. This means that funds are available internationally for less than they would be if the United Kingdom were a closed economy, so investment funds will come from abroad. Along the same vein, saving will be less in the United Kingdom than if it were a closed economy because they will receive less than the equilibrium rate. So, because borrowing is higher than the equilibrium level and saving is less than the equilibrium level, the current account balance is in deficit. Furthermore, interest rate movements along the national savings curve and the investment expenditures curve dictate the size and sign of the current account balance. Figure E can be used to analyze the impact of changes in national saving and investment expenditure behaviors on the current account balance (following the intertemporal model). From 1991 through 1998, because national saving grew faster than investment expenditures, the current account deficit shrank, hitting its low of $1.403 billion in 1997. After 1998, during which interest rates reached their highest point since 1992 of 7.2% (presumably driving up national saving along the way, since national saving is positively correlated with interest rate), national saving experienced a steep decline to just slightly over $150 billion in 1998. The fall in national saving combined with the continued rise of investment expenditures, brought about at least in part by a full two percentage point drop in interest rates, increased the current account balance to $35.4 billion in 1999. From 1999 through 2003, national savings and investment expenditures grew at about the same rate, keeping the current account deficit nearly constant over that time frame. However, from 2003 through 2006, national savings fell again due to another 1.2% drop in interest rates in 2002 followed by another

.3% in 2003, increasing the current account deficit to its peak of $80.9 billion in 2006. Throughout this time, investment had continued to rise steadily, probably because it was being driven up by decreasing interest rates (and investment expenditures are inversely related to interest rates). From 2006 to 2008, saving rose once again, coinciding with the 2007 spike in interest rates, and investment expenditures finally decreased in 2008. As a result, between 2006 and 2008, the current account deficit was drastically reduced from its 2006 peak. Furthermore, the decrease in investment expenditures in 2008 coincided with the coming of the global financial crisis, during which Britain got pushed into recession (The World Factbook). The balance of payments of the United Kingdom has been characterized by a current account deficit driven by a trade deficit. Throughout the 1990 to 2008 period, there were a few moments during which the current account deficit grew to high levels with respect to the nominal GDP. Factors that led to these levels included interest rates, incomes, and price levels; all of which are closely related IV: Exchange Rate Movements of the Pound Sterling Throughout most of the 1990 through 2008 period, the United Kingdom has had a floating exchange rate. However, this was not the case within the 1990 to 1992 period during which the United Kingdom was a member of the European Exchange Rate Mechanism, which required that monetary policy be set to maintain exchange rates with respect to various European currencies within a specified range. From the start of 1990 through the third quarter of 1992 period, the market exchange rate experienced somewhat high volatility, with a low of 0.514 per dollar and a high of 0.603 per dollar (as is shown in Figure I). In the fourth quarter of 1992, the United

Kingdom decided to let its currency float (removing itself from the Exchange Rate Mechanism), which resulted in a sharp depreciation (Monetary Policy in the UK). Figure I:

During the period of time in which the United Kingdom was a member of the European Exchange Rate Mechanism, the Bank of England was stuck in a Catch-22 type of situation because of rapid economic growth that was causing monetary policy tightening in member countries of the Exchange Rate Mechanism (the then recently reunified Germany in particular). The United Kingdom itself had just emerged from recession and was still experiencing slow growth, which would generally call for a loose monetary policy involving interest rate reductions (and, according to the uncovered interest rate parity, result in a depreciation of the pound). However, in order to maintain

an exchange rate in compliance with the Exchange Rate Mechanism, the Bank of England was forced to keep interest rates higher than would be healthy for the United Kingdom economy. This policy was the only thing keeping the pound overvalued. This led investors to trade away pounds for other currencies, since they did not believe that the Bank of England could maintain the high interest rates in the face of slow growth and low inflation. This forced the United Kingdom to withdraw from the European Exchange Rate Mechanism, resulting in the sharp depreciation of the pound in the fourth quarter of 1992, which coincided with a sharp decline in interest rates as the uncovered interest rate parity condition would predict (Monetary Policy in the UK). Both declines are evident in Table E. Figure J:

From the fourth quarter of 1992 onward, the United Kingdom has had a floating exchange rate policy (Monetary Policy in the UK). Figure I compares the market exchange rate of pounds for dollars to the theoretical exchange rate according to purchasing power parity (PPP). The first quarter of 1995 was chosen as the period during which purchasing power parity held, since it was the quarter after exchange rates were allowed to float during which the trade balance come closest to zero (it was $1.582 billion). Throughout the period from the fourth quarter of 1992 through 2008, the PPP exchange rate held fairly constant with around an average of 0.633 per dollar with an annual volatility of .0151 though the pound has been appreciating since the first quarter of 2001. This implies that inflation rates in the United States and the United Kingdom have been approximately equal in each quarter over the same time horizon, with inflation in the United Kingdom slightly outpacing inflation in the United States starting in the first quarter of 2001 (resulting in the PPP pound price for dollars increasing). Relative PPP theory indicates that the expected movement in the market exchange rate should be a depreciation of the pound in the long run, which, according to Figure I, is actually the opposite of what happened. It is possible that the appreciation of the pound until 2008 was due to an increase in the risk premium for the dollar, since the United States inflation rate experienced much more volatility than the United Kingdom inflation rate after the first quarter of 2001, as is apparent in Figure J (Azoulay, Brenner, and Landskroner). An increase in the risk premium of dollardenominated assets would result in an appreciation of the pound, which agrees with what actually happened as is shown in Figure I.

Figure K:

From the fourth quarter of 1992 through the third quarter of 1996, the market exchange rate stayed fairly close to the PPP exchange rate though the pound was appreciating throughout that period. For the several quarters preceding that period, GDP growth in the United Kingdom had severely lagged GDP growth in the United States, as is shown in Figure K. According to the Monetary Approach to Exchange Rate determination, when the United States economys rate of growth outpaces the United Kingdom economys rate of growth, the pound should depreciate with respect to the dollar. However, the opposite is what actually happened. From the fourth quarter of 1996 through the fourth quarter of 1999, the pound price for dollars stayed slightly below the PPP exchange rate due to appreciation of the pound. However, the pound

did reverse its trend of appreciation at the end of 1998. Over the same period, GDP growth in the United States outpaced GDP growth in the United Kingdom in most quarters. Though the appreciation of the pound during the first part of the period disagreed with the Monetary Approach to Exchange Rate determination, the pound did eventually depreciate with respect to the dollar, agreeing with the theory in the long run. Then, from the first quarter of 2000 through the first quarter of 2003, the pound price for dollars remained above the PPP exchange rate following a steep depreciation of the pound. In the four years leading up to the steep depreciation of the pound that began in the first quarter of 2000, GDP growth in the United States had outpaced GDP growth in the United Kingdom in thirteen of sixteen quarters, which, according to the Monetary Approach to Exchange Rate determination, would lead to a depreciation of the pound with respect to the dollar in the long run. This means that the depreciation of the pound agreed with the theory for the period spanning from the first quarter of 2000 through the first quarter of 2003. From the second quarter of 2003 through the third quarter of 2008, the pound almost continuously appreciated until it reached its peak value of 0.489 per dollar. This appreciation was attributable to a combination of economic stagnation in the United States and carry trade resulting from higher interest rates in the United Kingdom than abroad (Seager). GDP growth in the United States consistently lagged GDP growth in the United Kingdom from the beginning of 2001 through the second quarter of 2003, which means the appreciation of the pound in the following period agrees with the Monetary Approach to Exchange Rate determination, which predicts that a decline in the growth rate of the United States would lead to an appreciation of the pound in the long run. The appreciation of the pound to just above 0.50 per dollar

was followed by a sharp depreciation of the pound that brought the exchange rate back to 0.636 per pound in the fourth quarter of 2008, which was very close to the PPP exchange rate. The pound depreciation in 2008 was due to expectations of extended stagnation in the United Kingdoms economy (Wearden and Seager). However, United States GDP contracted along with United Kingdom GDP, indicating there must have been some other short run expectations causing the depreciation of the pound. In the short run, according to the theory of uncovered interest rate parity, exchanges rates are responsive to news and interest rate changes. According to the theory, holding expectations constant, an increase in the interest rate of the dollar should lead to a short term increase in the pound price of dollars due to an increase in demand for dollars, assuming that the risk premium for pound denominated assets does not change. Also, an increase in the interest rate of the pound should lead to a short term decrease in the pound price of dollars due to an increase in demand for pounds. Because both of these interest rates may be changing at any given moment, it helps to look at the movements in the difference of the interest rates. According to Figure L, as the interest rate in the United Kingdom went from being 4.3% higher than in the United States in the fourth quarter of 1992 to a being almost one percentage point lower than in the United States in the first quarter of 1995, the exchange rate went from 0.525 to 0.632 per dollar, an increase of twenty percent, which is in the direction that uncovered interest rate parity predicted. From the first quarter of 1995 through the fourth quarter of 1998, the interest rate in the United Kingdom rose to be about two percentage points higher than in the United States, but the exchange rate only went from 0.632 to 0.597 per dollar. The exchange rate movement was about six percent and in the same

direction as uncovered interest rate parity predicted (increase). From the first quarter of 1999 through the fourth quarter of 2000 the difference between the interest rates dropped to about negative one percent as the exchange rate rose to 0.692 per dollar, a rise of about sixteen percent, which is in the same direction as uncovered interest rate parity predicted. Then from the fourth quarter of 2000 through the second quarter of 2004 the difference in interest rates rose from negative one percent to three percentage points as the pound price of a dollar fell to 0.554 per dollar, a fall of about twenty percent, also in the same direction as uncovered interest rate parity predicted. From the second quarter of 2004 through the third quarter of 2006 the difference in interest rates dropped to -0.407%, but the exchange rate continued to rise, which, according to uncovered interest rate parity theory, means that expectations changed in favor of a stronger pound (or a weaker dollar) or the risk premium for pound-denominated assets decreased. This movement also agrees with the Monetary Approach to Exchange Rate determination, since the interest rate in the United States rose 4.2% while the interest rate in the United Kingdom rose .6%, indicating a rise in inflation expectations in the United States. From the third quarter of 2006 through the third quarter of 2008, the difference between the interest rates rose to 3.063% as the exchange rate fell from 0.534 to 0.529 (about one percent), which is in the direction that uncovered interest rate parity predicted. Figure L:

One of the predictions of the Monetary Approach to Exchange Rate determination is that if United States income growth increases, then the dollar price of pounds will decrease; and if United Kingdom income growth increases, then the dollar price of pounds will increase. However, it is difficult to make any conclusion regarding exchange rate movements in response to changes in the two countries income growth rates because they move largely in the same directions and are extremely volatile, as can be seen in Figure K. Furthermore, the sensitivities of the exchange rate to the income growth rate changes are unknown. Though the theoretical PPP exchange rate has not varied much over the 1990 through 2008 time period, the actual market exchange rate has seen several fluctuations (as is expected in the short run). Short run movements did usually occur in

the direction that uncovered interest rate parity predicted. Long run movements were more difficult to explain in terms of PPP theory because there are several variables moving simultaneously, but there were periods during which exchange rate movements agreed with the Monetary Approach to Exchange Rate determination. Interestingly, relative PPP did not hold in the most recent eight year period, possibly due to short run factors like risk premium. V: Global Financial Crisis and the Current Recession in the United Kingdom The credit crunch that was determined as beginning on August 9, 2007, has had devastating repercussions on the global financial system, including affecting the financial system of the United Kingdom (Timeline: Credit Crunch). It is thought to have caused the recession in the United Kingdom to have started sometime around May of 2008. Employment began to fall sharply starting in April 2008. The financial crisis has been characterized by a tightening of credit and deleveraging by the financial sector leading to dropping demand due to reduced investment and consumption (Blanchflower). On September 4, 2007, the London Interbank Overnight Rate (LIBOR) was over a percentage point higher than the Bank of Englands base rate of 5.75%, demonstrating how high credit spreads had become. Nine days later, Northern Rock asked for emergency support from the Bank of England, since it is the lender of last resort, which was followed by a bank run. The Bank of England opted to guarantee the depositors savings to stop the bank run. Later, the Bank of England injected ten billion pounds of funding into the markets (Timeline: Credit Crunch). In December 2007, the Bank of England partook in providing billions in loans to banks along with four other

central banks (led by the Federal Reserve) in hopes of forestalling credit tightening. This move was in response to rate cuts having failed to reduce the interbank rates, reflective of the fact that banks were unwilling to lend to each other (Central Banks Act). In October 2008, the United Kingdoms government unveiled a rescue plan to provide support for the banking system and help return liquidity to the money markets. The plan required banks to increase their capital by at least 25 billion (using government loans if necessary), 25 billion in capital were made available in exchange for preferred shares, 100 billion in short-term loans were made available from the Bank of England on top of the existing 100 billion, and 250 billion in commercial bank loan guarantees were provided to encourage interbank lending (Rescue Plan for UK Banks). In spite of the recessions hitting large economies worldwide (like in the United States), the Monetary Policy Committee of the Bank of England remained more concerned with the impact that the high commodity prices of early 2008 would have on inflation expectations than on the risk of the United Kingdom plunging into a similar recession. Finally, at the end of 2008, the Monetary Policy Committee changed its view regarding inflation, believing that excess capacity would curb price level increases and that recession was the main concern (Oxford Analytica). By this point (November), industrial production had already fallen 6.9% for the year. Overall, GDP contracted .6% in the third quarter and 1.5% in the fourth quarter, so clearly inflation should not have been the primary concern. In December 2008, CPI inflation undershot the two percent target by over one percent, and disinflationary pressures remained strong as demand

weakened (Blanchflower). A main driver of the reduced inflation rate were falling crude oil prices in the second half of 2008 that propagated through to fueling stations, resulting in reduced gasoline and diesel prices (Inflation). With regards to employment, the employment rate has been falling in the United Kingdom since early 2008. Unemployment rose 30,000 to 2.46 million in the third quarter of 2009, but that was the smallest increase in unemployment since the first quarter of 2008. That the increase was relatively small is indicative that the worst of unemployment increases may be over. However, many labor market experts believe that unemployment will reach 3 million. Moreover, one fifth of all young workers (a record high) are still unemployed (Allen, Mead and Wearden). In response to the falling economic output, the central government adopted a fiscal stimulus measure amounting to 20 billion. The bulk of the package (12.5 billion) was allocated to a 2.5% decrease on the Value-Added Tax on most goods and services, bringing it down to 15%. The decrease lasted from December 1, 2008 through January 1, 2010. Around 3 billion of the stimulus plan was allocated to infrastructure spending (Watts). According to figures from the International Monetary Fund, the Value-Added Tax reduction accounted for about 1.6% of GDP for 2009 although this GDP boost will disappear in 2010 (Q&A: Why Is the UK). To spur lending, first the Bank of England drastically reduced the bank rate from five percent in September 2008 down to two percent in December 2008 (Blanchflower). Despite these reductions, United Kingdom GDP contracted 2.4% during the first quarter of 2009, characterized by a 5.1% drop in industrial production and a 1.6% drop in service output. Specifically, construction output fell 6.9% and manufacturing output fell

5.1% (Quarterly National Accounts 1st Quarter 2009). The initial bank rate reductions have been followed up by even more reductions, bringing the bank rate to an all-time low of half of a percent in April of 2009. As of November 2009, the bank rate has been around 1.5%. These measures were necessary since the Monetary Policy Committee aims to keep inflation between one and three percent. Otherwise, the inflation target would have been higher than the actual inflation rate. The combination of the two facts 1) that the bank rate does not have much more room to fall and 2) that the reductions in the bank rate have not been completely successful at stimulating lending have led the Bank of England to pursue unconventional monetary policies. A reason that the low bank rate has not stimulated lending to the desired level is because lending standards have become more restrictive as a result of the financial sector deleveraging (Blanchflower). Additionally, the Bank of England has not specifically put pressure on lenders to lend. Moreover, one particular unconventional policy that the Bank of England has utilized is called quantitative easing. Its purpose is to inject more liquidity into the markets. Quantitative easing is a monetary policy instrument that involves the Bank of England purchasing assets (government and corporate bonds) off financial institutions' balance sheets with cash. The Bank of England directly deposits the cash electronically into companies accounts instead of using cash from the sale of Treasury Bills (Quantitative Easing Explained). The program had purchased its initial limit of 175 billion pounds of assets on March 5, 2009, but the Monetary Policy Committee decided to increase this limit by an additional 25 billion pounds on November 5, 2009. The committee opted not to increase the program's limit by the originally intended 50 billion

pounds because of inflation fears. With regards to fiscal policy measures the central government is essentially tapped out, as the budget deficit has grown to twelve percent of the gross domestic product as of November 2009 (Oxford Analytica). Additionally, the United Kingdoms government, in hopes of boosting demand in the housing market, temporarily suspended the stamp duty on property purchases costing less than 175,000. This raised the threshold for incurring the one percent duty by 50,000. The suspension was projected to cost the Treasury about 600 billion, preventing about half of all housing transactions from incurring the duty (Stamp Duty Axed). It appears that the combination of policies making homes and money cheaper have resulted in a turnaround in the plummeting housing market of the United Kingdom. The number of mortgages granted for house purchases fell starting in December 2007 to their lowest point during the recession of 23,000 mortgages, which occurred in the month of January 2009. However, the trend seems to have reversed, with the number of mortgages granted in October 2009 reaching 55,300, their highest point since December 2007 (Osborne). Furthermore, although house prices fell twenty three percent from the housing bubbles burst in August 2007 through April 2009, they rose 8.5% from then through November 2009 (Housing Prices Up). Another policy that the United Kingdoms government has adopted to stimulate to economy is a fiscal policy aimed at the auto industry. Dubbed the car scrappage scheme, the policy, which was announced in the first quarter of 2009, involves consumers receiving 2000 towards a new vehicle if their current vehicle is over ten years old, 1000 each from the government and from the motor industry. 300m in government funds were initially allocated, and the program was intended to end in

March 2010 (Milmo and Webb). In September, the government decided to provide an additional 100 billion in funding and reduced the age requirement on vans to eight years (Scrappage Scheme to Be Extended). It may be possible that the scrappage program had an effect on the manufacturing sector, since in the third quarter of 2009, manufacturing output fell .1%, which was less than the expected .2% (UK Economy Shrinks Less Than Thought). Despite various policy measures, the United Kingdoms economy has lagged behind the economies of the United States, Germany, and Japan (among others) in returning to economic growth. While those countries and others appear to have exited the recession, economic output contracted .3% in the third quarter, which makes the third quarter of 2009 the sixth consecutive quarter of economic contraction in the United Kingdom. This is the longest stretch of economic contraction that the United Kingdom has experienced since 1955. (UK Economy Shrinks Less Than Thought). A main reason for the United Kingdom being slow to exit the recession is because its consumers were more dependent on debt and preoccupied with property ownership than consumers in other countries (Q&A: Why Is the UK). However, according to Andrew Sentance of the Monetary Policy Committee, there is reason to believe that the United Kingdoms economy returned to growth in the second quarter of 2009. He claims that though the numbers still show declining output, consumers and companies confidence is returning, and global economic pressures are simultaneously declining. Additionally, he said that though the interest rate policy and quantitative easing have staved off the worst, commodity price volatility and the financial sector remain challenges to low-inflation growth (Griffiths).

VI: CONCLUDING REMARKS The United Kingdoms economic policies target steady growth with low inflation, and the policies have been largely successful except for in the most recent recession. Its balance of payments shows that its economy is deeply intertwined with the economies of the rest of the world, and the inflation-targeting policies have contributed to a fairly steady pound value for most of the 1990 through 2008 period. Though the current recession is the worst that the United Kingdom has seen in a very long time, signs of recovery are finally becoming visible, and the United Kingdoms economy will eventually return to low inflation growth once more. In the future, the lessons of the financial crisis ought to make policymakers more alert to asset price inflation (bubble formation) instead of only consumer price inflation.

Works Cited Allen, Paddy, Nick Mead, and Graeme Wearden. "Rising UK Unemployment." Guardian.co.uk. Guardian News and Media, 11 Nov. 2009. Web. 13 Dec. 2009. "Analysis: Low Unemployment." BBC News. British Broadcasting Corporation, 18 Oct. 2000. Web. 28 Sept. 2009. <http://news.bbc.co.uk/2/hi/business/978564.stm>. Blanchflower, David. "Macroeconomic Policy Responses in the UK." Lecture. Bank of England. Bank of England, 29 Jan. 2009. Web. 13 Dec. 2009. "Central Banks Act on Credit Fears." BBC News. British Broadcasting Corporation, 13 Dec. 2007. Web. 13 Dec. 2009. "Countries within a Country." Number 10. Prime Minister's Office, 10 Jan. 2003. Web. 28 Sept. 2009. "Explanatory Notes - M0." Bank of England. Bank of England. Web. 28 Sept. 2009. "Explanatory Notes - M4." Bank of England. Bank of England. Web. 28 Sept. 2009. "FactCheck: Has Gordon Brown Met His Golden Rule?" Channel 4. Channel 4, 7 Jan. 2008. Web. 28 Sept. 2009. "Fiscal Policy." HM Treasury. HM Treasury. Web. 28 Sept. 2009. Griffiths, Peter. "Bank's Sentance Says UK Economy Growing - Report." Ed. Dan Grebler. Reuters UK. Thomson Reuters, 25 Nov. 2009. Web. 13 Dec. 2009. "History." Bank of England. Bank of England. Web. 28 Sept. 2009. Holman, Jill A. "Is The Large U.S. Current Account Deficit Sustainable?" Economic Review (Apr. 2001): 5-23. Federal Reserve Bank of Kansas City. Federal Reserve Bank of Kansas City. Web. <http://www.kc.frb.org/publicat/econrev/PDF/1q01holm.pdf>.

Housing Prices up for Fifth Month in a Row. BBC News. British Broadcasting Corporation, 8 Dec. 2009. Web. 13 Dec. 2009. International Monetary Fund. International Financial Statistics. Web. 21 Sept. 2009. Israel. Bank of Israel. Monetary Department. Inflation Risk Premium Derived from Foreign Exchange Options. By Eddy Azoulay, Menachem Brenner, and Yoram Landskroner. Bank of Israel, Mar. 2007. Web. 24 Nov. 2009. King, Mervyn A. "CPI Letter." Letter to Alistair Darling. 15 Dec. 2008. Bank of England. Bank of England, 15 Dec. 2008. Web. 28 Sept. 2009. King, Mervyn A. "CPI Letter." Letter to Gordon Brown. 16 Apr. 2007. Bank of England. Bank of England, 16 Apr. 2007. Web. 28 Sept. 2009. Loney, Nick. "Managers and Professionals Dominate UK Job Growth." Management Today. Haymarket Media Group, 16 Dec. 2006. Web. 28 Sept. 2009. Milmo, Dan, and Tim Webb. "Buget 2009: Car Industry Welcomes Scrappage Scheme." Guardian.co.uk. Guardian News and Media, 22 Apr. 2009. Web. 13 Dec. 2009. "Monetary Policy Committee Decisions." Bank of England. Bank of England. Web. 28 Sept. 2009. <http://www.bankofengland.co.uk/monetarypolicy/decisions/decisions06.htm>. "Monetary Policy in the UK" Bank of England. Bank of England. Web. 24 Nov. 2009. O'Sullivan, Arthur and Steven M. Sheffrin. Economics Principles in Action. 2002. Upper Saddle River: Pearson Prentice Hall, 2006. Print. Osborne, Hilary. "Mortgage Lending at 22-Month High." Guardian.co.uk. Guardian News and Media, 10 Dec. 2009. Web. 13 Dec. 2009.

Oxford Analytica. "U.K. Copes With Recession." Forbes.com. Forbes.com, 10 Nov. 2009. Web. 13 Dec. 2009. <http://www.forbes.com/2009/11/09/monetary-policycommittee-uk-business-united-kingdom-oxford.html>. "Q&A: Why Is the UK Still Stuck in Recession?" BBC News. British Broadcasting Corporation, 13 Nov. 2009. Web. 13 Dec. 2009. "Quantitative Easing Explained." Bank of England. Bank of England. Web. 13 Dec. 2009. "Rescue Plan for UK Banks Unveiled." BBC News. British Broadcasting Corporation, 8 Oct. 2008. Web. 13 Dec. 2009. "Scottish Economic Report December 2006." The Scottish Government. Scottish Government, 19 Dec. 2006. Web. 28 Sept. 2009. <http://www.scotland.gov.uk/Publications/2006/12/19143801/8>. "Scrappage Scheme to Be Extended." BBC News. British Broadcasting Corporation, 28 Sept. 2009. Web. 13 Dec. 2009. Seager, Ashley. "Pound Rises to 14-Year High as Cheap Japanese Credit Floods in." Guardian.co.uk. Guardian News and Media, 24 Jan. 2007. Web. 24 Nov. 2009. Shaikh, Fiona. "UPDATE 2-Faster UK Money Supply Growth Bolsters Rate Hike Bets." Reuters. Thomson Reuters, 21 May 2007. Web. 28 Sept. 2009. <http://www.reuters.com/article/bankingfinancial-SP/idUSL2128075320070521>. "Stamp Duty Axed Below 175,000." BBC News. British Broadcasting Corporation, 2 Sept. 2008. Web. 13 Dec. 2009. "Timeline: Credit Crunch to Downturn." BBC News. British Broadcasting Corporation, 7 Aug. 2009. Web. 13 Dec. 2009.

"UK Economy Shrinks Less Than Thought." BBC News. British Broadcasting Corporation, 25 Nov. 2009. Web. 13 Dec. 2009. United Kingdom. UK Statistics Authority. Office for National Statistics. Export and import trade with EU and non-EU countries, 2002: Regional Trends 38. 2002. Web. 27 Oct. 2009. United Kingdom. UK Statistics Authority. Office for National Statistics. Inflation. 17 Nov. 2009. Web. 13 Dec. 2009. United Kingdom. UK Statistics Authority. Office for National Statistics. Quarterly Statistical Bulletin 1st Quarter 2009. 30 June 2009. Web. 13 Dec. 2009. United Kingdom. UK Statistics Authority. Office for National Statistics. UK Government Debt & Deficit. 31 Mar. 2009. Web. 28 Sept. 2009. Watts, William L. "U.K. Unveils $30 Billion Stimulus Plan." MarketWatch. Dow Jones and Company, 24 Nov. 2008. Web. 13 Dec. 2009. Wearden, Graeme, and Ashley Seager. "Pound Falls to Five-Year Low as Bank Head Admits Recession Is Here" Guardian.co.uk. Guardian News and Media, 22 Oct. 2008. Web. 24 Nov. 2009. "The World Factbook -- United Kingdom." CIA. Central Intelligence Agency, 24 Sept. 2009. Web. 28 Sept. 2009.

Table A: Components of United Kingdom GDP

Yea r Household Consumpti on (billions of ) Fixed Capital Formati on (billions of ) 116.900 107.741 103.930 103.968 111.736 121.364 130.346 138.307 155.997 161.722 167.172 171.782 180.551 186.700 200.415 209.758 227.370 248.766 241.336 Changes in Inventories (billions of ) -1.800 -4.927 -1.937 0.329 3.708 4.391 1.611 4.594 5.455 6.289 5.274 6.585 3.123 3.946 4.849 4.095 5.293 7.360 1.422 Governme nt Expenditu res (billions of ) 112.483 123.841 131.632 133.781 138.278 143.032 148.767 150.652 156.490 169.652 181.972 194.584 212.577 232.819 251.114 268.088 285.187 294.713 315.614 Exports of Goods and Services (billions of ) 136.583 138.662 145.480 165.834 183.215 207.147 229.047 237.478 233.284 242.691 269.819 276.866 280.536 290.677 303.796 330.794 377.879 371.503 417.032 Imports of Goods and Services (billions of ) 148.647 142.573 152.177 170.726 186.180 208.005 228.457 233.019 240.094 256.180 287.793 300.878 308.609 316.672 336.282 373.641 419.409 416.450 461.030 Nominal GDP (billions of ) 570.283 598.664 622.080 654.196 692.987 733.266 781.726 830.094 879.102 928.730 976.533 1021.830 1075.560 1139.750 1202.960 1254.060 1325.800 1398.880 1442.920

199 354.764 0 199 375.920 1 199 395.152 2 199 421.010 3 199 442.230 4 199 465.337 5 199 500.412 6 199 532.082 7 199 567.970 8 199 604.556 9 200 640.089 0 200 672.889 1 200 707.386 2 200 742.276 3 200 779.064 4 200 814.964 5 200 849.475 6 200 892.990 7 200 928.552 8 Source: IMF Yea r Consume r Price Index (2005=1 00)

Table B: United Kingdom Inflation, Growth and Population Related Measures

GDP Volume (2005=10 0) Populati on (millions ) Labor Force (millions) Unemployment Rate (% of Labor Force) Per Capita GDP (2005 )

199 65.699 0 199 69.545 1 199 72.141 2 199 73.269 3 199 75.084 4 199 77.645 5 199 79.546 6 199 82.038 7 199 84.842 8 199 86.161 9 200 88.683 0 200 90.298 1 200 91.774 2 200 94.448 3 200 97.248 4 200 100.000 5 200 103.195 6 200 107.605 7 200 111.903 8 Source: IMF

69.030 68.069 68.169 69.684 72.666 74.877 77.033 79.581 82.450 85.314 88.654 90.836 92.741 95.354 97.984 100.000 102.838 105.946 106.695

57.237 57.395 57.556 57.719 57.881 58.042 58.201 58.358 58.522 58.703 58.907 59.138 59.392 59.667 59.958 60.261 60.575 60.899 61.231

n.a. n.a. n.a. 28.2338 28.1818 28.2552 28.357 28.5133 28.5838 28.8948 29.07 29.1993 29.45 29.676 29.911 30.2422 30.7002 30.8772 31.2215

n.a. n.a. n.a. 10.400 9.525 8.650 8.125 7.000 6.275 5.975 5.450 5.075 5.175 5.025 4.750 4.825 5.425 5.350 5.700

15124.441 14872.787 14852.928 15140.125 15743.966 16178.005 16598.341 17101.142 17668.120 18225.410 18873.340 19262.432 19582.187 20041.210 20493.961 20810.474 21290.140 21816.884 21851.992

Table C: United Kingdom Fiscal and Monetary Policy Measures

Year Net Operating Balance (billions of ) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. M0 (billions) M4 (billions) Money Market Interest Rate (%) 14.731 11.580 9.367 5.908 4.878 6.080 5.959 6.612 7.210

1990 1991 1992 1993 1994 1995 1996 1997 1998

19.492 20.085 20.581 21.729 23.322 24.539 26.153 27.802 29.346

477.138 504.133 517.883 544.055 567.157 623.385 682.786 722.133 783.354

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: IMF

10.741 14.897 11.072 -15.293 -31.011 -31.027 -45.339 -24.166 -26.671 -54.652

32.768 34.566 37.319 39.540 42.317 44.462 47.090 n.a. n.a. n.a.

816.601 884.873 942.594 1008.750 1081.300 1179.190 1328.320 1498.920 1675.410 1955.32

5.204 5.767 5.075 3.887 3.591 4.288 4.698 4.772 5.674 4.649

Table D: United Kingdom Balance of Payments

YEAR GOODS EXPORTS: F.O.B. GOODS IMPORTS: F.O.B TRADE BALANCE SERVICES: CREDIT SERVICES: DEBIT BALANCE ON GOODS AND SERVICES INCOME: CREDIT INCOME: DEBIT BALANCE ON GOODS, SERV. & INC. CURRENT TRANSFERS, N.I.E. : CRE CURRENT TRANSFERS: DEB NET TRANSFERS CURRENT ACCOUNT, N.I.E. CAPITAL ACCOUNT, N.I.E. CAPITAL ACCOUNT, N.I.E.: CREDIT CAPITAL ACCOUNT: DEBIT 1990 182.80 4 215.35 3 32.549 56.422 48.737 24.863 139.83 7 144.99 1 30.017 16.870 25.664 -8.794 38.811 0.888 2.071 -1.184 1991 183.50 6 201.67 4 18.168 56.278 49.000 10.890 133.69 0 139.63 4 16.833 25.085 27.273 -2.189 19.022 0.504 1.907 -1.403 1992 189.36 6 212.69 8 23.332 64.227 54.523 13.628 117.27 0 116.99 5 13.353 22.164 32.016 -9.851 23.204 0.746 2.162 -1.416 1993 183.31 3 202.96 1 -19.648 62.377 -52.307 -9.578 109.38 2 109.66 6 -9.862 18.664 -26.523 -7.860 -17.721 0.460 1.669 -1.209 1994 207.18 8 224.13 5 16.947 69.925 59.959 -6.981 113.97 5 108.86 4 -1.870 17.809 25.964 -8.156 10.026 0.046 1.931 -1.884 1995 242.31 8 261.32 4 19.006 79.796 65.677 -4.887 138.97 9 135.58 6 -1.493 19.808 31.751 11.943 13.436 0.841 1.835 -0.994 1996 261.24 7 282.47 5 21.228 90.584 73.018 -3.663 144.17 9 143.41 5 -2.899 31.201 38.631 -7.429 10.329 1.966 3.006 -1.040 1997 281.53 7 301.73 9 20.203 101.64 2 78.542 2.898 157.89 9 152.52 5 8.272 21.400 31.075 -9.675 -1.403 1.571 3.062 -1.491 1998 271.72 3 307.85 1 36.127 112.59 6 88.299 11.831 172.64 6 152.21 1 8.605 20.471 34.349 13.878 -5.273 0.815 2.507 -1.692 1999 268.88 4 315.89 6 47.012 119.06 8 97.054 24.998 165.68 9 164.24 5 23.554 19.517 31.371 11.853 35.407 1.205 2.632 -1.427

FINANCIAL ACCOUNT, N.I.E.

26.495 20.124 33.504 13.380 29.952 -1.096 28.856 23.756 3.436 20.321 94.789 -1.610 68.337 114.10 0 0.000

14.830 16.754 16.452 -0.302 56.901 24.465 32.436 18.221 4.676 13.544

1.980 19.699 16.559 -3.140 49.270 7.435 56.705 16.192 18.262 -2.070 60.506 -0.705 34.863 96.458 0.000

22.668

4.728 34.897 10.725 24.171

3.669 49.111 21.732 27.380 61.691 13.145 48.546 58.786 8.070 50.716 74.902 -0.742 36.687 106.22 2 0.000

3.987 36.692 27.391 -9.302 93.371 16.423 76.949 67.999 9.399 58.600 214.67 9 -2.973 102.09 8 251.82 2 0.000

18.467 60.892 37.505 23.387 85.001 7.013 92.013 43.654 7.849 35.805 277.85 0 -0.199 241.01 0 322.21 9 0.000

16.321 122.80 9 74.652 48.157 53.230 -4.954 48.275 35.156 63.173 28.016 22.864 0.122 31.227 110.48 3 0.000

46.650 202.50 3 89.337 113.16 6 34.318 23.873 10.445 171.33 2 103.35 3 67.979 68.700 -0.613 19.753 87.091 0.000

DIRECT INVESTMENT ABROAD DIR. INVEST. IN REP. ECON., N.I.E. NET DIRECT INVESTMENT PORTFOLIO INVESTMENT ASSETS PI EQUITY SECURITIES ASSETS PI DEBT SECURITIES ASSETS PORTFOLIO INVESTMENT LIAB., N.I.E. PI EQUITY SECURITIES LIAB PI DEBT SECURITIES LIAB

-27.254 16.518 -10.736 133.55 1 -11.923 121.62 8 43.635 26.117 17.518

31.474 -1.473 32.947 47.006 7.350 39.656 42.449 -0.688 73.108 10.798 0.000

OTHER INVESTMENT ASSETS OI GEN GOVT ASSETS OI BANKS ASSETS OTHER INVESTMENT LIAB., N.I.E. OI MON AUTH LIAB

35.292 -1.201 52.692 18.521 0.000

-68.460 -0.713 7.244 191.41 1 0.000

OI GEN GOVT LIAB OI BANKS LIAB OI OTHER SECTORS LIAB

-0.461 93.697 20.864

-1.356 16.762 36.639

-0.441 55.952 40.947 2.2456 1 2.246 13.882 -6.596 6.596 2.432 4.165 1.512 1.766 93.482 80.737 8 622.08 0 101.99 3 78.789 19.330

0.333 59.494 131.58 4 0.3675 73 0.368 0.021 5.428 -5.428 -1.265 -4.163 1.481 1.502 85.743 74.535 1 654.19 6 104.29 7 86.576

0.858 76.620 88.276 3.6654 9 3.665 6.752 1.500 -1.500 -1.484 -0.017 1.563 1.532 86.277 76.578 8 692.98 7 115.44 4 105.41 8

0.589 41.952 63.680 2.6341 9 2.634 8.073 -0.853 0.853 0.896 -0.043 1.550 1.578 82.551 74.535 1 733.26 6 125.75 5 112.31 9 20.200

-1.056 111.44 7 141.43 1

-1.739 243.12 3 80.835 1.8974 3 1.897 14.395 -3.904 3.904 3.904 0.000 1.654 1.638 96.793 91.375 4 830.09 4 142.90 1 141.49 8 90.610

0.419 84.786 25.278 5.0670 4 -5.067 12.120 -0.257 0.257 0.257 0.000 1.664 1.656 100.30 2 97.087 7 879.10 2 161.45 2 156.17 9 194.07 0

0.535 10.844 75.712 4.4101 7 4.410 13.484 -1.036 1.036 1.036 0.000 1.616 1.618 100.04 6 98.211 7 928.73 0 168.01 1 132.60 4 304.18 0

FINAN DERIVATIVES: NET FINAN DERIVATIVES: LIABIL NET ERRORS AND OMISSIONS OVERALL BALANCE FINANCING RESEREVE ASSETS EXCEPTIONAL FINANCING MARKET RATE MARKET RATE NEER FROM ULC REER BASED ON RNULC GROSS DOMESTIC PRODUCT SA INVESTMENT EXPENDITURES NATIONAL SAVINGS

n.a. n.a. 11.470 0.042 -0.042 -0.131 0.089 1.928 1.785 96.142 78.581 6 570.28 3 115.1 76.289 24.340

n.a. n.a. 8.389 4.701 -4.701 -4.656 -0.045 1.871 1.769 96.886 82.505 6 598.66 4 102.81 4 83.792

1.518 1.518 3.722 -0.653 0.653 0.653 0.000 1.698 1.562 83.705 77.212 3 781.72 6 131.95 7 121.62 8 94.200

NET FOREIGN ASSETS

-4.840

46.470

38.040

YEAR GOODS EXPORTS: F.O.B. GOODS IMPORTS: F.O.B TRADE BALANCE SERVICES: CREDIT SERVICES: DEBIT BALANCE ON GOODS AND SERVICES INCOME: CREDIT INCOME: DEBIT BALANCE ON GOODS, SERV. & INC. CURRENT TRANSFERS, N.I.E. : CRE CURRENT TRANSFERS: DEB NET TRANSFERS

2000 284.37 8 334.22 8 49.850 3 120.39 7 99.747 3 29.200 6 201.55 6 196.39 9 24.044 1 15.944 9 30.701 1 14.756 2

2001 272.27 9 331.56 7 59.288 1 120.97 8 100.19 3 38.503 2 200.92 7 183.32 7 20.902 6 20.036 6 29.414 8 -9.3782

2002 279.86 6 351.63 6 -71.77 135.30 8 110.02 3 46.484 2 184.54 7 152.66 2 14.599 3 18.409 8 31.668 6 13.258 8

2003 307.79 9 387.25 4 79.454 9 158.61 5 -127.25 48.089 8 203.10 8 -169.02 14.001 3 19.699 9 35.700 6 16.000 7

2004 349.65 2 461.14 111.48 8 197.73 149.90 1 63.659 254.37 3 217.30 6 26.592 6 25.217 3 44.039 6 18.822 3

2005 384.31 8 509.04 4 124.72 6 207.67 4 -162.83 79.882 5 338.70 3 296.59 3 37.772 7 31.660 5 53.293 8 21.633 3

2006 447.58 9 588.24 7 140.65 8 237.39 9 175.21 1 78.469 9 437.94 7 418.52 7 59.049 8 34.005 1 55.836 6 21.831 5

2007 442.27 9 622.01 8 179.74 284.80 4 201.61 2 96.548 3 584.30 7 535.38 5 47.626 8 28.132 7 55.234 6 27.101 9

2008 466.34 4 639.32 2 172.97 8 286.85 7 203.61 3 89.733 5 500.60 8 430.86 7 19.992 5 28.397 9 54.075 8 25.677 9

CURRENT ACCOUNT, N.I.E. CAPITAL ACCOUNT, N.I.E. CAPITAL ACCOUNT, N.I.E.: CREDIT CAPITAL ACCOUNT: DEBIT FINANCIAL ACCOUNT, N.I.E.

38.800 3 2.5694 9 3.9426 1 1.3731 2 39.705 5 246.26 5 122.15 7 124.10 8

30.280 8 1.8903 8 4.7928 2 2.9024 4 34.316 2

27.858 2 1.4200 6 3.5072 4 2.0871 8 36.263 2 50.329 1 25.531 8 24.797 3 1.2196 6 7.4071 6.1874 3 74.323 7 2.3186 7

-30.002 2.4247 2 4.5914 8 2.1667 6 34.809 1 65.636 8 27.612 2 38.024 6 58.423 7 -29.793 28.630 7 172.78 9 32.609

45.414 9 3.7787 6 6.5959 9 2.8172 3 53.823 93.946 1 57.333 7 36.612 4 259.44 9 102.96 1 156.48 8 178.29 5 3.5941 4

-59.406 2.8252 6 7.8534 9 5.0282 3 52.618 3

80.881 3 1.8058 1 7.4036 5 5.5978 4 69.537 4 85.623 2 154.12 68.496 8 256.99 4 35.433 6 221.56 285.53 8 18.343 4

74.728 6 5.1725 7 9.2237 2 4.0511 5 66.184 275.50 2 197.76 6 77.736 179.56 2 55.290 2 124.27 1 406.66 8 25.241 1

45.670 4 6.3350 9 10.406 6 4.0714 7 27.737 139.32 7 97.535 7 41.791 3

DIRECT INVESTMENT ABROAD DIR. INVEST. IN REP. ECON., N.I.E. NET DIRECT INVESTMENT PORTFOLIO INVESTMENT ASSETS PI EQUITY SECURITIES ASSETS PI DEBT SECURITIES ASSETS PORTFOLIO INVESTMENT LIAB., N.I.E. PI EQUITY SECURITIES LIAB

-61.816 53.842 1 -7.9739 124.73 4 63.632 9 -61.101 59.057 2 22.567 6

-80.79 177.40 5 96.615 273.41 1 108.42 3 164.98 8 237.03 5 12.452 4

-97.188 28.461 7 68.726 3 268.1 191.74

210.18 111.74 3 98.437 3 456.03 4 81.419 1

PI DEBT SECURITIES LIAB

76.359 5 374.43 2 -0.3564 282.15 5 365.07 1 0 0.0002 86 308.61 8 56.453 4 2.2627 4 2.2627 4 1.8257 1

36.489 6 250.84 4 0.0613 8 125.67 7 346.62 8 0 0.3966 95 178.25 1 167.98 12.182 7 12.182 7 10.382 2

72.005 108.53 6 0.8247 7 110.38 8 92.702 2 0 1.0070 3 139.84 5 46.135 3 1.3506 7 1.3506 7 10.459 8

140.18

174.70 1 595.88 2 1.6615 1 400.91 7 781.74 3 0 0.7690 9 529.72 2 252.79 14.271 9 14.271 9

224.58 3 926.19 4 -1.4792 541.60 4 902.04 8 0 0.2619 65 517.25 5 384.53 1 16.525 2 16.525 2 5.6943 9

303.88 2 708.25 8 1.9442 7 532.49 1 666.27 4 0 1.5258 5 598.88 2 65.866 5

381.42 7 1484.2 9 2.1928 4 1197.6 1439.1 7 0 0.0987 8 1370.7 7 68.501 4 38.075 38.075 5.9417 3

374.61 5 933.42 4 5.6257 4 416.04 9 1554.0 7 0 0.3163 61 949.81 3 604.57 6 23.961 6 23.961 6 8.5246 7

OTHER INVESTMENT ASSETS OI GEN GOVT ASSETS OI BANKS ASSETS OTHER INVESTMENT LIAB., N.I.E. OI MON AUTH LIAB OI GEN GOVT LIAB OI BANKS LIAB OI OTHER SECTORS LIAB

-420.93 0.4933 7 259.34 5 387.89 3 0 0.8277 33 280.43 9 106.62 6 8.4943 5 8.4943 5 9.8237 7

FINAN DERIVATIVES: NET FINAN DERIVATIVES: LIABIL

14.48 14.48 8.2367 6

NET ERRORS AND OMISSIONS

-11.78

OVERALL BALANCE

5.3004 3 5.3004 3 5.3004 3 0 1.4922 1.5161 1 103.29 5 102.18 7 976.53 3 172.44 6 133.64 6 143.51 0

4.4564 7 4.4564 7 4.4564 7 0 1.4504 1.4399 6 101.53 1 101.46 1 1021.8 3 178.36 7 148.08 6 198.01 0

0.6346 6 0.6346 63 0.6346 63 0 1.6118 1.5012 6 101.96 5 101.30 8 1075.5 6 183.67 4 155.81 6 193.37 0

2.5918 8 2.5918 8 2.5918 8 0 1.7847 1.6343 7 96.880 5 95.738 8 1139.7 5 190.64 6 160.64 4 209.07 0

0.4068 3 0.4068 3 0.4068 3 0 1.9314 1.8318 100.84 2 100.34 7 1202.9 6 205.26 4 159.84 9 426.28 0

1.7319

1.3013 5 1.3013 5 1.3013 5 0 1.963 1.8426 3 100.90 1 102.48 3 1325.8 232.66 3 151.78 2 692.10 0

2.5696 8 2.5696 8 2.5696 8 0 2.0034 2.0016 8 103.00 1 104.35 3 1398.8 8 256.12 6 181.39 7 566.00 0

3.0735 5 3.0735 5 3.0735 5 n.a. 1.4578 1.8532 4 89.786 7 90.077 7 1442.9 2 242.75 8 197.08 8 135.50 0

FINANCING RESEREVE ASSETS EXCEPTIONAL FINANCING MARKET RATE MARKET RATE NEER FROM ULC REER BASED ON RNULC GROSS DOMESTIC PRODUCT SA INVESTMENT EXPENDITURES NATIONAL SAVINGS

-1.7319 -1.7319 0 1.7219 1.8204 100 100 1254.0 6 213.85 3 154.44 7 434.28 0

NET FOREIGN ASSETS

Table E: United Kingdom and United States Exchange Rate, GDP, Interest Rate, and Inflation Data
UK Overnight Interbank UK Market US Minimum Consumer Exchange US Federal Consumer UK UK GDP US GDP Rate Prices Rate Funds Rate Prices UK NEER REER Volume Volume 14.773 62.699 0.6031 8.250 65.560 92.924 74.426 69.268 63.715 15.043 65.634 0.5974 8.243 66.226 93.162 75.767 69.634 63.878 14.960 66.710 0.5371 8.160 67.369 99.205 81.887 68.806 63.882 14.147 67.752 0.5141 7.743 68.462 99.277 82.408 68.412 63.399 13.333 68.151 0.5236 6.427 69.025 98.977 83.667 68.350 63.077 11.627 69.575 0.5855 5.863 69.435 96.602 82.235 68.123 63.486 10.920 69.888 0.5935 5.643 69.981 95.868 81.856 67.865 63.792 10.440 70.565 0.5637 4.817 70.510 96.095 82.439 67.937 64.092 10.587 70.947 0.5647 4.023 71.005 95.734 83.125 68.029 64.756 10.253 72.475 0.5534 3.770 71.585 97.459 83.708 67.866 65.380 9.293 72.423 0.5249 3.257 72.149 96.095 83.063 68.202 66.021 7.333 72.718 0.6333 3.037 72.661 84.640 73.229 68.578 66.748 6.083 72.232 0.677 3.040 73.275 83.349 72.359 68.998 66.829 5.627 73.395 0.651 3.000 73.838 85.652 74.181 69.312 67.168 6.543 73.603 0.6649 3.060 74.128 87.160 75.992 69.911 67.513 5.377 73.846 0.6707 2.990 74.641 86.809 75.798 70.514 68.421 4.877 73.951 0.6725 3.213 75.118 87.481 76.678 71.270 69.117 4.753 75.288 0.6653 3.940 75.596 86.066 75.869 72.285 70.018 4.920 75.305 0.6452 4.487 76.262 85.219 76.207 73.289 70.410 4.960 75.791 0.6309 5.167 76.620 86.344 77.752 73.821 71.236 5.127 76.468 0.6321 5.810 77.252 84.764 76.258 74.074 71.411 5.960 77.857 0.6262 6.020 77.935 82.120 73.956 74.476 71.565 6.523 78.066 0.6353 5.797 78.276 82.027 74.416 75.316 72.167 6.710 78.187 0.6406 5.720 78.652 81.293 73.700 75.643 72.670 6.127 78.587 0.6532 5.363 79.369 81.200 74.242 76.341 73.168 6.000 79.611 0.6562 5.243 80.154 82.233 75.573 76.695 74.432 5.793 79.750 0.6435 5.307 80.580 82.977 76.821 77.228 75.080 5.917 80.236 0.6105 5.280 81.161 88.410 82.449 77.868 75.900

Quarte r Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

6.003 6.233 6.980 7.230 7.417 7.357 7.313 6.753 5.920 5.167 5.083 4.647 6.000 5.770 5.773 5.523 5.983 5.317 4.957 4.043 3.563 4.000 3.960 4.023 3.880 3.667 3.460 3.357 3.607 4.230 4.543 4.770 4.817 4.783 4.583 4.607

80.705 81.729 82.528 83.188 83.448 84.994 85.272 85.654 85.289 86.192 86.261 86.904 87.251 88.883 89.022 89.578 89.474 90.585 90.619 90.515 90.567 91.696 92.009 92.825 93.346 94.457 94.700 95.290 95.759 97.061 97.634 98.537 98.798 99.978 100.343 100.881

0.6135 0.6116 0.6154 0.6024 0.6079 0.605 0.6053 0.5967 0.6124 0.6223 0.6246 0.6131 0.6223 0.6523 0.6766 0.6916 0.6854 0.7042 0.6954 0.6935 0.7013 0.6835 0.646 0.6378 0.6238 0.6177 0.6211 0.5865 0.5438 0.554 0.5501 0.5362 0.5285 0.5385 0.5605 0.5721

5.277 5.523 5.533 5.507 5.520 5.500 5.533 4.860 4.733 4.747 5.093 5.307 5.677 6.273 6.520 6.473 5.593 4.327 3.497 2.133 1.733 1.750 1.740 1.443 1.250 1.247 1.017 0.997 1.003 1.013 1.440 1.947 2.473 2.940 3.460 3.973

81.707 82.031 82.356 82.680 82.902 83.345 83.670 83.960 84.284 85.104 85.633 86.162 87.015 87.937 88.637 89.115 89.968 90.907 91.026 90.770 91.095 92.085 92.477 92.767 93.706 94.047 94.508 94.525 95.379 96.744 97.086 97.666 98.280 99.595 100.806 101.319

93.410 95.941 98.523 99.298 101.518 101.580 100.785 97.325 97.614 100.351 100.103 102.118 104.380 103.522 102.118 103.161 100.424 102.014 101.818 101.870 102.582 101.260 101.797 102.221 98.884 95.786 95.930 96.922 100.795 101.870 101.446 99.256 99.773 101.043 99.535 99.649

86.921 90.288 93.481 95.149 97.932 98.526 98.076 94.248 95.395 98.618 98.649 100.65 103.16 102.40 101.20 102.55 100.27 102.26 102.10 101.87 102.33 100.89 101.25 101.46 97.851 94.525 94.719 96.039 100.30 101.66 101.39 99.191 99.56 100.71 99.488 100.24

78.464 79.106 79.899 80.854 81.513 82.018 82.704 83.566 84.044 84.703 85.778 86.729 87.692 88.543 88.986 89.394 90.374 90.597 91.017 91.357 92.002 92.367 93.007 93.587 94.107 94.991 95.707 96.613 97.043 97.954 98.144 98.794 99.208 99.827 100.23 100.72

76.483 77.617 78.591 79.194 79.942 80.661 81.726 83.140 83.881 84.537 85.612 87.149 87.377 89.082 89.156 89.684 89.388 89.974 89.727 90.044 90.818 91.300 91.756 91.775 92.147 92.882 94.438 95.288 95.959 96.641 97.351 98.195 99.175 99.598 100.35 100.87

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

4.593 4.540 4.843 5.110 5.317 5.613 5.910 5.857 5.380 5.047 5.003 3.167

101.159 102.913 103.798 104.909 105.760 107.462 107.896 109.302 109.962 112.150 113.227 112.272

0.5705 0.5473 0.5336 0.5216 0.5115 0.5035 0.495 0.4888 0.5053 0.5076 0.5285 0.6361

4.457 4.900 5.250 5.247 5.257 5.250 5.073 4.497 3.177 2.087 1.940 0.507

101.865 103.589 104.169 103.281 104.334 106.334 106.628 107.386 108.607 110.991 112.282 109.106

99.081 99.876 101.580 103.068 104.121 103.636 103.615 100.630 94.556 91.396 90.528 82.667

100.49 101.97 103.88 105.08 105.87 105.31 105.10 101.84 95.425 92.018 91.004 83.074

101.87 102.55 103.02 103.90 104.77 105.58 106.24 107.18 107.51 107.48 106.71 105.06

102.19 102.56 102.59 103.34 103.65 104.47 105.40 105.95 105.76 106.14 105.43 103.98

Source: IMF