Readers Question: When does velocity of money pick up and why will it? Clearly, the reason US inflation worriers have been wrong so far (NB). Is it confidence or policy? The velocity of circulation / velocity of money refers to how frequently the money stock in an economy is used in a given period. In …
The natural rate of interest is the interest rate consistent with maintaining economic growth at its trend rate and stable inflation. Another definition of the natural rate of interest is: “the real interest rate consistent with real GDP equalling its potential level (potential GDP) in the absence of transitory shocks to demand. (FR) In other …
Long-term economic forecasting can be very difficult. A well known joke by John Kenneth Galbraith is: “The only function of economic forecasting is to make astrology look respectable.” However, although there is some truth in this wisecrack, in the short term, we can be reasonably confident about predictions for inflation. In particular, if we see …
Readers Question: Would a cap on house prices work? Despite the recession and credit crunch, UK house prices continue to rise. (See: Why are UK house prices so high?) This has caused record levels of house price to income multiples. For homebuyers in London, house prices are approaching a record seven times average earnings. Understandably …
Interest rates have been cut to a record low of 0.25% – essentially due to grim economic news from the short-run demand side shock of Brexit. Economic theory states that in normal circumstances, lower interest rates should boost aggregate demand (AD). To give a quick recap, lower interest rates should in theory: Reduce the incentive …
In 2015, the German current account surplus surged to 8.5% of GDP. A record level and a surplus which has implications for the Eurozone and global economy. Source: Bundesbank The surplus is primarily due to the surplus on trade in goods. Though in recent years, there has also been a surplus in primary income. This …
How will UK house prices be affected by Brexit – in both the short term and long-term? In the past few decades, the UK property market has been characterised by a long-term rise in real house prices. UK house prices have risen faster than inflation – especially in London and South. In fact, we could …
Readers question: Will a sustained recovery in the UK lead to inflation? A sustained economic recovery could lead to inflation. If economic growth is above the long run trend rate for a prolonged period, if demand grows faster than productivity, then in that scenario we are likely to see rising inflation (rise in the cost …