The Economy: Returning to Balance?

In October 1981 in "An Economy Out of Balance" we examined the state of the economy following the severe shocks of 1979 and 1980. We warned that adjustments in some markets, particularly for goods and labour, might be "painfully slow", In this Viewpoint we bring that study up to date. We argue that the recent fall in the exchange rate has helped to correct some of those imbalances and that there should now be the basis for a recovery of output and a check to the rise in unemployment.     

Economic Viewpoint The Company Sector and the Economic Recovery

Prospects for the economy in the coming years depend largely on whether the private sector will expand activity and increase its employment. The immediate concern is to reverse the falls of output and employment since 1979; the longer-term concern is to generate sustained growth. In the short term. the recovery of output will depend signficantly on whether companies are prepared to rebuild stock levels. In the longer term, a sustained increase in output and employment will require an expansion of the capital stock. In each case what is needed is an increase in company expenditure. Recent experience suggests that such an increase will require a rise in the company sector's income. In this Economic Viewpoint we consider how an increase in the company sector's income and expenditure could be achieved and argue that a cut in the National Insurance Surcharge is a particularly efficient method .     

The Determination of Fair Profits for the Property-Liability Insurance Firm

Single period and dynamic valuation models in continuous time, under certainty and uncertainty, are developed for a property-liability insurance contract to determine the “fair” (competitive) premium and underwriting profit. The intertemporal stochastic model assumes that the claim frequency and the price index of claim settlements are functions of a set of underlying state variables which follow a multivariate Wiener process. The competitive premium is shown to be proportional to the claim frequency and the price index for claim settlements at the time the policy is issued. The factor of proportionality varies directly with the claim settlement rate and the length of coverage, and inversely with the risk-adjusted real interest rate on the dollar-valued claim rate.     

Using the Murphy Model to Provide Short-run Macroeconomic Closure for ORANI

A macro model incorporating rational expectations in financial markets (the Murphy Model–MM) is used to endogenize the macroeconomic environment for a comprehensive general equilibrium model (ORANI). The interface exploits the existence of variables which are endogenous to both models, calibrating on a shock to government spending. Prospective benefits include: (1) to the numerous policy oriented users of ORANI, a facility allowing the macroeconomic environment to be determined by a macrodynamic model such as MM; (2) to these users, reassurance that ORANI's short-run translates in calendar time to about two years; (3) to the clientele of a macro model, the possibility of much more detailed projections.