Exchange Rate Policy: Is this where we came in?

In the second issue of Economic Outlook (April 1977) we published an article entitled "Why the exchange rate must be set free". In this Viewpoint we recall the arguments we presented then and consider their relevance to the present debate about exchange rate policy. We conclude that circumstances now are rather different from those in 1977 and that the choice between monetary targeting and exchange rate targeting is not as simple as it appeared then. Nevertheless we do believe that in the circumstances of recent month it was correct to let the exchange rate rise above its unofficial "ceiling" of DM3 rather than to pursue a specific exchange rate target.     

Tightening the Fiscal and Monetary Controls

The Medium-Term Financial Strategy (MTFS) is a new departure in post-war policy-making. As David Smith's Briefing Paper shows the ideas behind it are well rooted in historical experience, but nevertheless it was inevitable that there would be a major element of trial and error in the early years of its use. The experience of 1980-81 however has produced some alarming results. The monetary limits have been drastically exceeded and the PSBR is likely to be far above the original target. There are two possible explanations. Either the control system is gravely defective or the government has deliberately followed the kind of short-term discretionary policies (and has indulged in the kind of ad hoc interventionism) which the strategy was expressly designed to avoid. We believe that both explanations are true. It is also probable that they reinforced each other. The first year of the strategy was likely to be the year of greatest strain. It involved a highly ambitious attempt to reduce inflation at a time when cost pressures from wages and higher energy prices were particularly strong. The strains rapidly revealed the defects in the control system. Since the government was alarmed at the short-term consequences of its policies, it chose to make a virtue of necessity and in effect suspended its commitment to the control of sterling M3. It is possible to look back at 1980 and to say that, in the event, the government's loss of control over its policies was justified as statesmanlike flexibility. But there always appear to be good reasons for sacrificing long-term objectives for short-term expediency. The MTFS was intended to avoid the chronic tendency to accept the easy option. It is essential that in 1981 the commitment to the MTFS should be re-established and that it should be reinforced, as appears to be necessary, by a system of indicators and controls to ensure that the errors of 1980 are not repeated. Otherwise there is a serious risk that the hard-won gains in the fight against inflation will be lost in the economic upturn. In the first part of this Viewpoint we examine what happened to fiscal and monetary policy in 1980 and discuss the general lines that policy should follow in 1981-82. We conclude that in order to get fiscal policy back on course the authorities should aim for a PSBR of £10 bn in 1981-82. In the second part we discuss in more detail the reasons why monetary policy went so badly astray in 1980, focusing particularly on the role of the Bank of England. We argue that just as ‘dirty floating’ (i.e. the pursuit of exchange rate objectives) may threaten the monetary targets, so ‘dirty monetarism’ (i.e. the pursuit of interest rate objectives) may prove an even greater threat. We conclude that the discretionary activities of the Bank of England contributed to the excessive monetary growth in 1980, and that it is necessary to ensure that in future the Bank should conduct its policy on a non-discretionary basis.     

Political Connections and the Informativeness of Insider Trades

We analyze the trading of corporate insiders at leading financial institutions during the 2007 to 2009 financial crisis. We find strong evidence of a relation between political connections and informed trading during the period in which Troubled Asset Relief Program (TARP) funds were disbursed, and that the relation is most pronounced among corporate insiders with recent direct connections. Notably, we find evidence of abnormal trading by politically connected insiders 30 days in advance of TARP infusions, and that these trades anticipate the market reaction to the infusion. Our results suggest that political connections can facilitate opportunistic behavior by corporate insiders.     

THE IMPACT OF ANTISMOKING POLICIES IN KOREA ON QUIT SUCCESS AND SMOKING INTENTIONS

In 2001 and 2002, the Korean government dramatically increased cigarette taxes, anti‐smoking advertisements, and smoking prohibitions as part of an anti‐smoking campaign. This paper examines the impacts of these policy changes by modeling quit success and smoking intentions pre‐ and post‐policy and attributing model differences to anti‐smoking policies. Model results provide evidence that national anti‐smoking policies increased both quitting success and intention to quit. However, the impacts of these policies are uneven throughout Korean society. Females and those who exercise for health maintenance experienced higher quit success. Heavy smokers and high frequency alcohol drinkers stated they are less likely to quit smoking post‐policy. One impact of national anti‐smoking policies is reduced provincial differences among Koreans in both quit success and intention to quit. Future anti‐smoking policies should address the different needs of these groups. (JEL D12, I19)     

Briefing Paper

Between the end of 1979 and the end of 1981 unemployment rose by 1.4 million. After that exceptional period unemployment continued to rise rather less rapidly to its current level of 3.2 million, Of this 3.2 million, about 1.3 million have been unemployed for more than a year. In this Briefing Paper we describe and attempt to explain the processes by which long-term unemployment rose to its current level.
We also discuss two related questions; the first concerns the relationship between unemployment and vacancies and the second concerns the relationship between long-term unemployment and inflation. The final sections consider the policy implications of these findings.