Michael Wickens's picture
Affiliation: 
Cardiff Business School & University of York
Credentials: 
Professor of economics

Voting history

Euro weakness in 2022

Question 2: Should the ECB respond to movements in the euro-dollar exchange rate of the nature observed in 2022?

Answer:
No
Confidence level:
Confident
Comment:
Monetary policy should target inflation, not the exchange rate. This implies higher interest rates and a stronger euro.

Question 1: What was the main cause for the euro’s decline relative to the US dollar in 2022?

Answer:
Monetary policy differences
Confidence level:
Confident
Comment:
The key factor is the effect of UIP on nominal exchange rates over a period of time. ECB was slower than the Fed to raise interest rates and has raised them less to combat energy shocks and their transmission to other prices. As a result, inflation is higher, and is expected to remain higher, for longer than that in the US. UIP tells us that this would cause the euro to depreciate relative to the US dollar.

Addressing UK public finances after the mini-budget crisis

Question 3: Given the desired amount of deficit reduction, the Autumn Statement on balance:

Answer:
No opinion or other
Confidence level:
Confident
Comment:
As explained there was no need for either big spending or big tax cuts.

Question 2: Relative to the Autumn statement, would the UK be better off reducing public debt

Answer:
Substantially slower
Confidence level:
Confident
Comment:
As explained, the debt-GDP ratio is already falling due negative real interest rates. Fiscal austerity just reduces growth and economic welfare. Despite the recent market tantrum, UK's the debt-GDP ratio is lower than, for example, the US and Germany, and the UK has never defaulted on its debt, so rationally the markets should not be concerned about a slow reduction in the UK's debt-GDP ratio.

Question 1: How necessary was it for the UK government to lower its deficit through tax increases or spending cuts in November 2022?

Answer:
Desirable
Confidence level:
Confident
Comment:
The aim of government policy should be to improve people's welfare. The main practical implication of this is to keep inflation low and growth high. At present inflation is high and growth is low. Reducing the deficit or government debt is justified only if it is consistent with improving welfare. As far as the fiscal position is concerned, the aim should be to reduce debt. Reducing the deficit achieves this and historically the UK has run primary surpluses. But historically inflation has been a larger influence on reducing the debt-GDP ratio while growth has not been a large factor. At present, thanks in part to the incompetence of the Bank of England, the real rate of interest less growth is heavily negative. This implies that the debt-GDP ratio will steadily fall over time without any deficit reduction. So reducing the deficit is not strictly necessary. Moreover, it will reduce growth which will slow the automatic reduction in the debt-GDP ratio. If, of course, real interest rates were to become positive then, given the UK's low growth, deficit reduction would become essential for the debt-GDP to fall.

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