¹ See Hibbs, D., ‘Political Parties and Macroeconomic Policy’, American Political Science Review, LXXI (1977), 1467–87CrossRefGoogle Scholar and Alt, J., ‘Political Parties, World Demand, and Unemployment: Domestic and International Sources of Economic Activity’, American Political Science Review, LXXIX (1985), 1016–40.CrossRefGoogle Scholar

² Lange and Garrett show that Norway has sustained the most rapid economic growth among a sample of European nations. They argue that this is due to the combination of prolonged Left government and corporatist institutions, but acknowledge the importance of oil. This article shows that, rather than necessarily producing growth (for which the rest of their sample provides scant evidence) the political-institutional complex they describe can be regarded as a necessary – though not sufficient – condition to turn an external shock into a beneficial opportunity. See Lange, P. and Garrett, G., ‘The Politics of Growth: Strategic Interaction and Economic Performance in the Advanced Industrial Democracies, 1974–80’, Journal of Politics, XLVII (1985), 792–827CrossRefGoogle Scholar, and ‘Performance in a Hostile World: Economic Growth in Capitalist Democracies, 1974–1980’, World Politics, XXXVIII (1986), 517–45.Google Scholar

³ See King, Anthony, ‘Ideas, Institutions and the Policies of Governments’, British Journal of Political Science, III (1973), 291–314 and 409–24.CrossRefGoogle Scholar We will restrict discussion to countries with industrial economies, so typical development studies' concerns of initiating investment and dominant agricultural interests are not a problem. For a general discussion of how the organization of interests affects policy and how domestic policy-makers have targets and respond with instrument settings, see Alt, J. and Chrystal, K. A., Political Economics (Berkeley: University of California Press, 1983), Chaps. 2,6.Google Scholar

⁴ North, D., Structure and Change in Economic History (New York: Norton, 1981).Google Scholar

⁵ For instance, Ardant, G., ‘Financial Policy and Economic Infrastructure of Modern States and Nations’, in Tilly, C., ed., The Formation of National States in Western Europe (Princeton, NJ: Princeton University Press, 1975)Google Scholar; Rogowski, R., ‘War, Trade, and Domestic Politics’, paper presented to the annual meeting of the American Political Science Association, Washington, DC, 1986Google Scholar, or Katzenstein, P., Small States in World Markets (Ithaca: Cornell University Press, 1985).Google Scholar

⁶ See Winch, D., Economics and Policy (London: Hodder & Stoughton, 1969)Google Scholar, and Weir, M. and Skocpol, T., ‘State Structures and the Possibilities for “Keynesian” Responses to the Great Depression’, in Evans, P. et al. , eds, Bringing the State Back In (Cambridge: Cambridge University Press, 1985), pp. 107–63CrossRefGoogle Scholar, for arguments about the diffusion of ideas and the permeability of state bureaucracies.

⁷ Openness has many other meanings, of which the most important is as a description of the relative state of an economy's tariff frontiers.

⁸ Weatherford, S., ‘The International Economy as a Constraint on Domestic Macroeconomic Policymaking’, paper presented at the annual meeting of the American Political Science Association, New Orleans, 1985, p. 4.Google Scholar

⁹ Shonfield, A., The Use of Public Power (Oxford: Oxford University Press, 1982), p. 104.Google Scholar

¹⁰ Zysman, J., Governments, Markets, and Growth (Ithaca: Cornell University Press, 1983), p. 6.Google ScholarOstrom, E. (‘Formulating the Elements of Institutional Analysis’, University of Indiana, mimeo, 1985)Google Scholar describes the analysis of institutions as how ‘rules, goods, and production technologies and communities of understanding jointly affect the structure of situations in which individuals face incentives, adopt strategies of actions, and produce outcomes for themselves and others’. Certainly this paper emphasizes rules, regimes and communities of understanding (ideas) as important institutions.

¹¹ This paragraph summarizes ideas found in Alt, ‘Political Parties’; Katzenstein, P., Corporatism and Change (Ithaca: Cornell University Press, 1984)Google Scholar; Katzenstein, , Small StatesGoogle Scholar; Zysman, , Governments, Markets, and GrowthGoogle Scholar; Cameron, D., ‘Social Democracy, Corporatism, Labour Quiescence, and the Representation of Economic Interest in Advanced Capitalist Society’, in Goldthorpe, J., ed., Order and Conflict in Contemporary Capitalism (Oxford: Oxford University Press, 1984)Google Scholar; and Lange, and Garrett, , ‘The Politics of Growth’.Google Scholar

¹² See Lindblom, C., Politics and Markets (New York: Basic Books, 1977)Google Scholar on the threat to disinvest. For ideas about the relationship of finance and industry and the importance of an independent central bank, see Epstein, G. and Schor, J., ‘The Political Economy of Central Banking’, mimeo, 1986.Google Scholar

¹³ Mjøset, L., ‘Nordic Economic Policies in the 1970s and 1980s’, Oslo, mimeo.Google Scholar

¹⁴ Zysman, Thus (Governments, Markets, and Growth, pp. 62–5, 260–3)Google Scholar writes of a credit-based system dominated by financial institutions (Germany) where banks exercise market power over stock prices. Financing is by loans but at market prices and without Bundesbank intervention to direct allocation of credit. The influence of banks rests on their being a source of finance, banks' legal right to own stock and exercise proxies for other shareholders, and domination of stock market or bond issues. Their influence is diluted by competition; German banks are less concentrated than banks in France or Britain.

¹⁵ Ingham, G., Capitalism Divided (London: Macmillan, 1984), p. 224.CrossRefGoogle ScholarIngham, (pp. 66–8)Google Scholar also describes how retained earnings and shares amounted to 52 per cent of new capital in the period 1950–72 in Britain as against 36 per cent in Germany, and trivial amounts in France and Japan. There is a trend toward bank finance more recently but it is small and erratic. Moreover, the clearing banks have historically avoided any long-term involvement with industry and in addition own less than 1 per cent of the value of ordinary shares quoted on the Stock Exchange. On growth of British banks in the nineteenth century and their centralization and concentration since the First World War, see Moran, M., The Politics of Banking (New York: St. Martin's, 1984)CrossRefGoogle Scholar and Coakley, J. and Harris, L., The City of Capital (Oxford: Blackwell, 1983).Google Scholar

¹⁶ For example, the British decision to devalue in 1967 changes the parity, not the rules. Talking about institutional change here is talking about change in the procedures by which a country's exchange rate is determined.

¹⁷ Throughout the Bretton Woods regime, weaker-currency countries like Britain repeatedly found that attempts to inflate their economies produced rapid outflows of currency reserves as imports surged and foreign holders sold sterling in anticipation of inflation.

¹⁸ McCulloch, R., ‘Unexpected Real Consequences of Floating Exchange Rates’, Princeton Essays in International Finance, no. 153 (1983), p. 3.Google Scholar See also Black, S., ‘The Analysis of Floating Exchange Rates’Google Scholar, in Williamson, J., Exchange Rate Rules (New York: St. Martin's, 1980).Google Scholar

¹⁹ Cairncross, A., Years of Recovery (London: Methuen, 1985).Google Scholar

²⁰ The overall world market for international currency transactions is clearly vast, and London has managed to take the largest share. It has been estimated that, in the later 1970s, the daily turnover in foreign currency exchange was $50 billion in London, $40 billion in New York, $10 billion in Frankfurt, and $2 billion in Tokyo. The growth has resuscitated British international banks, according to Ingham, (Capitalism Divided, pp. 52–4)Google Scholar especially as Eurocurrency banking is first and foremost an interbank phenomenon. On Eurocurrency banking, see Bryant, R., ‘Eurocurrency Banking: Alarmist Concerns and Genuine Issues’, OECD Economic Studies, I (1983), 8–41Google Scholar. On difficulties of regulating international banking activities, see Hawley, J., ‘Protecting Capital from Itself’, International Organization, XXXVIII (1984), 131–65.CrossRefGoogle Scholar

²¹ Bryant, , ‘Eurocurrency Banking.’Google Scholar

²² Holden, K., Peel, D. and Thompson, J., Modelling the UK Economy (Oxford: Martin Robertson, 1982).Google Scholar

²³ Noreng, O., ‘Norway’, in El Mallekh, R., Noreng, O., and Poulson, B., eds, Petroleum and Economic Development (Lexington, Mass.: Lexington Books, 1984).Google Scholar

²⁴ On the Scandinavian model itself, see Aukrust, O., ‘Inflation in the Open Economy: A Norwegian Model’, in Krause, L. and Salant, W., eds, Worldwide Inflation (Washington, DC: Brookings, 1977)Google Scholar. While Finland and Iceland pursue policies which ‘guarantee the profitability of the dominant export sector’, the Norwegian economy is not characterized by a cyclical pattern where the fluctuations of the dominant export sector influence the economy as a whole. Rather fluctuations mainly occur in imports. See Mjøset, , ‘Nordic Economic Policies’Google Scholar.

²⁵ For the general debate, see Alt, and Chrystal, , Political Economics, Chap. 3Google Scholar. The exchange rate discussion follows McCulloch, , ‘Unexpected Real Consequences’, pp. 11–12.Google Scholar

²⁶ Holden, , Peel, and Thompson, , Modelling the UK EconomyGoogle Scholar, write that the London Business School model does contain a ‘combination of the distinction between traded and non-traded goods sectors introduced in Nordic (or Scandinavian) inflation models with monetary equilibrium’. Indeed, this formulation is used to model the exchange rate, rather than the demand/supply for sterling approach of the other models, though the role of oil is incorporated through a term representing OPEC-nation sterling balances.

²⁷ An extensive survey of economic policy changes in the first Thatcher administration is contained in Alt, J., ‘New Wine in Old Bottles’, paper presented to the Conference on the Resurgence of Conservatism in the Anglo-American Democracies, Calgary, May 1986Google Scholar. There are coincident changes in income distribution, manufacturing employment, and unemployment. Low interest rates, especially in 1977–78, and loose fiscal policy in 1972–75 probably had real effects, but fiscal and monetary policy do not generally show consistent party differences. Moreover, no clear changes in domestic policy emerge to explain the unemployment, other than the fact that Thatcher takes over and unemployment goes up. Neither high unemployment nor labour market reforms enhance union power, though they stay able to defend real wage levels of those still employed. Whiteley, P. (‘Evaluating Mrs Thatcher's Monetarist Experiment’, paper presented to the annual meeting of the American Political Science Association, New Orleans, 1985)Google Scholar in a rigorous statistical examination also finds no changes in money supply growth large enough to explain subsequent changes in output or unemployment.

²⁸ This version of the real exchange rate reflects relative prices in Britain and thirteen competitor countries, adjusted for currency exchange rates between them, published by the International Monetary Fund. Such calculated relative price (cost) indices provide broad indications of gain or loss in price (cost) competitiveness or relative profitability. Calculated values do not measure overvaluation or undervaluation of a given currency, other than relative to an arbitrary base period. See Maciejewski, E., ‘“Real” Effective Exchange Rate Indices’, IMF Staff Papers, XXX (1985), 491–541Google Scholar and Bank of England, ‘Measures of Competitiveness’, Quarterly Bulletin, XXII (1982), 360–75.Google Scholar

²⁹ See Frankel, J., ‘On the Mark: A Theory of Floating Exchange Rates’, American Economic Review, LXXIX (1979), 610–22Google Scholar; Meese, R. and Rogoff, K., ‘The Out-of-Sample Failure of Empirical Exchange Rate Models’, in Frenkel, J., ed., Exchange Rates and International Macroeconomics (Chicago: University of Chicago Press, 1983), 67–105Google Scholar; and Shafer, J. and Loopesko, B., ‘Floating Exchange Rates after Ten Years’, Brookings Papers on Economic Activity (1983), 1–86.CrossRefGoogle Scholar

³⁰ Under strict purchasing power parity, the real exchange rate is a constant. On effects causing deviations from purchasing power parity, see Korteweg, P., ‘Exchange Rate Policy, Monetary Policy, and Real Exchange Rate Variability’, Princeton Essays in international Finance, no. 140 (1980).Google Scholar

³¹ Similar effects (relative output, money growth, interest rates and balance of payments) are demonstrated in Meese, and Rogoff, , ‘The Out-of-Sample Failure’Google Scholar, and Shafer, and Loopesko, , ‘Floating Exchange Rates’.Google Scholar

³² According to Fitzgerald, D., ‘Comment’, in Batchelor, R. and Wood, G., eds, Exchange Rate Policy (New York: St. Martin's, 1982)Google Scholar, this is what analysing the real exchange rate means.

³³ Variables in the real exchange rate equation should include domestic and foreign money and interest rates, domestic and foreign GDP, oil and oil-exporting countries' balance of payments. See Beenstock, M., Budd, A. and Warburton, P., ‘Monetary Policy, Expectations and Real Exchange Rate Dynamics’, Oxford Economic Papers (07 Supplement, 1983), 85–119Google Scholar. The thrust of the monetary literature is that exchange markets adjust expectations in response to policy changes faster than do goods or labour markets, leading to exchange rate overshooting. See Dornbusch, R., ‘Expectations and Exchange Rate Dynamics’, Journal of Political Economy, LXXXIV (1976), 1161–76CrossRefGoogle Scholar. Structural complications include the current trade account, the production of North Sea oil, and capital flows. It is interesting to note Budd's remark (in Batchelor, and Wood, , Exchange Rate Policy, p. 167)Google Scholar that ‘We at the London School have persistently failed to forecast the exchange rate correctly … the role of interest rates in the determination of exchange rates is a temporary one … North Sea oil, especially with regard to its effect on the current account, appears to have a significant and permanent effect’. We provide below an estimating technique general enough to make the question of temporary and sustained effects an empirical one.

³⁴ See Niehans, J., ‘The Appreciation of Sterling – Causes, Effects, Policies’, Bern, mimeo, 1981Google Scholar. Moreover, Niehans writes, the ‘argument would seem to apply … primarily to interest-bearing sterling assets’, which at unchanged asset supplies would keep interest rates low, if additional demand was met by government borrowing (though note that this asserts that interest rates uniquely determine asset demand, as if dividends alone determined share investment). Finally, ‘if the central bank simply provided the additional sterling balances, both the initial sterling appreciation and the subsequent deflationary pressure could be avoided … [this was] always part of monetarist doctrine’ (p. 24), but being part of doctrine does not mean it was done.

³⁵ Niehans, , ‘The Appreciation of Sterling’.Google Scholar

³⁶ Sir Alan Walters, Margaret Thatcher's personal economic adviser, cites Niehans' analysis approvingly. See Walters, A., Britain's Economic Renaissance (New York: Oxford University Press, 1986), p. 142Google Scholar. He also makes the point that there has previously been no rigorous effort to survey oil effects on sterling.

³⁷ In spite of its obvious appeal, we will forgo consideration of the Dutch case until a later paper. Valuable contributions include Corden, W., ‘The Exchange Rate, Monetary Policy, and North Sea Oil: The Economic Theory of the Squeeze on Tradeables’, Oxford Economic Papers, XXXIII (07 Supplement, 1981), 23–45CrossRefGoogle Scholar; Corden, , ‘Exchange Rate Policy and the Resources Boom’, Economic Record, LVIII (1982), 18–31CrossRefGoogle Scholar; Corden, , ‘Booming Sector and Dutch Disease Economics’, Oxford Economic Papers, XXXVI (1984), 359–80CrossRefGoogle Scholar; van Wijnbergen, S., ‘The “Dutch Disease”: A Disease After All’, Economic Journal, XCIV (1984), 41–55CrossRefGoogle Scholar; van Wijnbergen, S., ‘Inflation, Unemployment, and the Dutch Disease in Oil Exporting Countries’, Quarterly Journal of Economics, XCIX (1984), 233–50CrossRefGoogle Scholar; Eastwood, R. and Venables, A., ‘The Macroeconomic Implications of a Resource Discovery in an Open Economy’, Economic Journal, XCII (1982), 285–99CrossRefGoogle Scholar; and Chrystal, K. A., ‘Dutch Disease or Monetarist Medicine?: The British Economy under Mrs Thatcher’, Federal Reserve Bank of St. Louis Review, LXVI (1984), 27–37.Google Scholar

³⁸ One can very roughly equate traded goods with manufacturing and non-traded goods with services though obviously some services can be exported and some manufactured goods are sold only at home.

³⁹ McCulloch, , ‘Unexpected Real Consequences’Google Scholar. Note that the spending may be direct or by government if collected in taxes, but the effect will appear as long as there is some income elasticity in non-tradables. Exporters can feel pressure from real appreciation either because of a strong currency (Netherlands), high domestic inflation (Egypt), or both (Great Britain). See van Wijnbergen, , ‘Inflation’Google Scholar.

⁴⁰ For example, Atkinson and Hall claim that ‘From 1977 to 1980 the real exchange rate rose by about 35 per cent while the nominal exchange rate rose by about 25 per cent … On this basis we might assess the effect of oil on the real exchange rate … as about 10 per cent’ (Atkinson, F. and Hall, S., Oil and the British Economy (London: Croom Helm, 1983), p. 132)Google Scholar. The low estimate of oil's share in GDP is found in Forsyth, P. and Kay, J., ‘The Economic Implications of North Sea Oil Revenues’, Fiscal Studies, I (1980), 1–28CrossRefGoogle Scholar; the high estimate is in Noreng, O., The Oil Industry and Government Strategy in the North Sea (London: Croom Helm, 1980)Google Scholar. Other explicitly or implicitly low estimates of oil's exchange rate contribution are Darby, M. and Lothian, J., ‘Measuring and Analyzing the Cyclically Adjusted Budget’Google Scholar, in Federal Reserve Bank of Boston, The Economics of Large Goverment Deficits, 1983Google Scholar; Buiter, W. and Miller, M., ‘The Thatcher Experiment: The First Two Years’, Brookings Papers on Economic Activity (1981), 315–79CrossRefGoogle Scholar; and Buiter, and Miller, , ‘Changing the Rules: Economic Consequences of the Thatcher Regime’, Brookings Papers on Economic Activity (1983), 305–79CrossRefGoogle Scholar. Others leave the exchange rate question open (Corden, , ‘The Exchange Rate’Google Scholar, Bruno, M. and Sachs, J., ‘Energy and Resource Allocation: A Dynamic Model of the “Dutch Disease”’, Review of Economic Studies, XLIX (1982), 845–59)CrossRefGoogle Scholar, or suggest a larger effect, though using a different definition of the real exchange rate (Beenstock, , Budd, and Warburton, , ‘Monetary Policy’)Google Scholar. The largest effects are proposed by Bond, M. and Knöbl, A., ‘Some Implications of North Sea Oil for the UK Economy’, International Monetary Fund Staff Papers, XXIX (1982), 363–97CrossRefGoogle Scholar, but their analysis appears to exclude all non-oil effects on the balance of payments. McGuirk, A., ‘Oil Price Changes and Real Exchange Rate Movements among Industrial Countries’, International Monetary Fund Staff Papers, XXX (1983), 843–84CrossRefGoogle Scholar, projects 20 percent or more real revaluation in effective sterling vis-à-vis other industrial countries, but assumes no energy demand price elasticity or export price elasticity to reduce the effect of energy prices on the trade balance.

⁴¹ For instance, it can be argued that the true Dutch Disease in the Netherlands was not the adverse effects on manufacturing of real appreciation but rather those of using oil revenues for social service levels which were not sustainable but were politically difficult to reduce. See Corden, , ‘Booming Sector’Google Scholar, and Posthumus, G., ‘The Netherlands: Financial-Economic Adjustment Policies’, in de Ceceo, M. ed., International Economic Adjustment (New York: St. Martin's, 1983), pp. 74–98.Google Scholar

⁴² Say speculators wish to transfer dollar-denominated assets to sterling-denominated assets. To do this, they must go through foreign exchange markets. Their desire (remember to add ‘other things equal’ to this and every other proposition in this paragraph) increases demand for pounds, and to induce holders of pounds to give them up must increase the price of the pound. Banks will meet the demand by arranging currency swaps, but ultimately British banks will have to give up pounds and the exchange rate move up. Probably the prevailing flow is bank-to-bank in the form of deposits and purchases of bonds, so Britain will show a capital account surplus, and as British bank money balances rise, interest rates will tend to fall (as the extra supply of funds places downward pressure on rates for domestic lending). If lower interest rates reduce demand for sterling, some new equilibrium can be reached at a combination of lower interest and higher exchange rates. A ‘floor’ under interest rates (that is, any evidence that the Bank of England is unprepared to meet the excess demand for pounds by increasing the supply of money) or any downward stickiness in interest rates would cause the bid price of sterling to rise, perhaps sharply.

⁴³ This effect of inflation expectations is at best predictable only when inflation concerns dominate markets. Another problem is that various regulations and tax and transactions costs prevent free repatriation of offshore deposits, but little is known about the costs and benefits of repatriation. See McKinnon, R., Money in International Exchange (New York: Oxford University Press, 1979), p. 128.Google Scholar

⁴⁴ McCulloch, , ‘Unexpected Real Consequences’, p. 7.Google Scholar

⁴⁵ Frenkel, J., ‘The Collapse of Purchasing Power Parities during the 1970s’, European Economic Review, XVI (1981), 145–65, esp. pp. 161–2CrossRefGoogle Scholar; McCulloch, , ‘Unexpected Real Consequences’, esp. pp. 7–8Google Scholar; Frenkel, J., ‘Flexible Exchange Rates, Prices, and the Role of “News”’Google Scholar, in Batchelor, and Wood, , Exchange Rate Policy, 48–93, esp. pp. 75–6.Google Scholar

⁴⁶ Given other possibilities (buying the oil itself, other markets), and transactions costs, the elasticity of real exchange rate to relative stock price should be less than one. It will also be affected by its relative risk premium vis-à-vis alternative assets.

⁴⁷ Since there is no reason to disbelieve the sort of structural effects on exchange rates discussed above, a prudent speculator might respond to them, and an appropriate model of investment behaviour would include balance of payments figures as well.

⁴⁸ Noreng, , The Oil Industry, p. 188.Google Scholar

⁴⁹ Data for changes in government and world levels of economic activity are extensively described in Alt, , ‘Political Parties’.Google Scholar

⁵⁰ The standard asset-pricing model equates rates of return, commonly measured by periodic differences in prices, but this model is in levels. It probably could be put in difference form to test equality of rates of return hypotheses. See Brealey, R. and Myers, S., Principles of Corporate Finance (New York: McGraw-Hill, 1981)Google Scholar. However, the elasticity estimates the proportionate change, and in magnitude is close to the final estimates reported below. Also note that for convenience, the variable is the ratio of oil to industrial stocks. Given the appropriate weights, the industrial average excluding oil stocks could have been calculated. The actual variable is a moving average of adjacent pairs of end-of-quarter figures.

⁵¹ Each country's inflation series was analysed in the standard ARIMA way to diagnose an optimal forecasting model, which was used to generate a set of one-step forecasts for inflation. These forecasts, based on historical values, were then subtracted from each country's interests rate series to give a real (i.e., adjusted for inflation expectations) interest rate series. At each month, the highest and lowest values of the countries' interest rates determine the bounds in Figure 5.

⁵² To be a substitute or competitor, a currency must float to some extent and be available in plentiful supply.

⁵³ We tried to generate a measure for GDP relative to world GDP, but found no case where this affected the estimates very much. We assume the ‘world’ balance of payments is in balance, so both these terms in equation (3) reflect domestic levels only.

⁵⁴ Estimation of the models in this paper follows the procedure presented in the Appendix to my earlier paper (Alt, , ‘Political Parties’, pp. 1038–9)Google Scholar. All series are assumed tobe ARIMA (p, d, q), to contain autoregressive elements of order p, moving average elements of order q, and to be integrated to order d, in order to convert an underlying random series of input shocks (the errors) into the observed series. Thus d = 0 in the real exchange rate model, and is allowed to vary from one in the unemployment estimates (where it is called d ₀). Other input series' contributions are assumed to be described by two or more parameters, one of which is a scalar parameter b, which estimates the amplitude of the shock, and the other(s) are dynamic parameter(s), usually designated with a d, estimating the rate of re-equilibration from a shock, or the duration of impact. The analysis was all done using a general-purpose non-linear algorithm and the SAS statistical package.

⁵⁵ The meaning of the GDP term varies in different models according to whether it is wealth (so b _GDP > 0) or money demand (b _GDP > 0). Many claim that the effects of GDP work through their effects on interest rates.

⁵⁶ The residuals (original innovations) from the Norwegian model are not white, so the possibility of bias in other coefficients remains. No obvious pattern to eliminate appeared, however.

⁵⁷ The time constant (1/(1 − d)) measures a point where about 63 per cent of a shock's cumulative effects have been felt. Two time constants are needed for about 95 per cent of the effect to be complete. See Mackuen, M., More Than News (Beverly Hills: Sage, 1983)Google Scholar, Chap. 1 for an example of how to calculate the time constant for a dynamic model.

⁵⁸ The cumulative effect, or gain, from a unit shock is b/(1 − d), where b is the scalar and d the dynamic parameter. Again, see Mackuen, , More Than NewsGoogle Scholar.

⁵⁹ The coding and calculation of real relative interest rates could be hiding a stronger effect, but some subsequent efforts at estimation with different definitions did not materially affect the results. Of course, moving away from historical values as the basis of expectations might also change the results.

⁶⁰ The difference between these values and those from an ordinary regression is that this model is evaluated as a sum of components each of which contains all (discounted) past values of the independent variable. That is, in the model of Table 2(a), at time t, the contribution of OSP is 0.2[OSP _t + 0.54(OSP _t−1) + 0.54²(OSP _t−2) + … ] and these sums of weighted products are themselves summed to predict the real exchange rate. Hence, calculation of fitted values is equivalent to a full simulation of the model with variables' observed values and using estimated parameters.

⁶¹ One must bear in mind that the real exchange rate is an index number, and there is no way to demonstrate that any one value is the equilibrium value.

⁶² Of course, it could all be a fluke, but both coefficients for oil stock prices in Table 3(a) are extremely well-determined (5−6 times standard errors) and hardly vary at all while major changes are made (sensitivity tests) in other parameter estimates.

⁶³ Norway, 's ‘dw’Google Scholar coefficient in Alt, , ‘Political Parties’Google Scholar, Table 5, is misprinted: it should be 0.95. There are potentially serious technical problems with the scalar impact coefficients in this model. Given that a quarterly variable is being used with a monthly dependent variable, some attenuation of significance is to be expected. Because competitiveness was not modelled in the pre-floating rates era, some partisan shift coefficients were constrained to original values, so the whole exercise is riskier and strong inferences should not be made.

⁶⁴ As far as can be determined, the major effect is the world recession, which in going from minimum to maximum adds half a percentage point to Norwegian unemployment. The effects of competitiveness and real relative interest rates seem to be less large, and to offset each other. Of course, there was not a great deal of variance in the Norwegian real exchange rate to begin with. I am sceptical of this result, but have not found a more satisfactory model.

⁶⁵ Noreng, , ‘Norway’.Google Scholar

⁶⁶ Steinmo, S., ‘The Policy of North Sea Oil: The Legacy of Arm's-Length Government’, Master's essay, University of California, Berkeley, 1979.Google Scholar

⁶⁷ For instance, the wealth effect of the resource discovery also causes an ‘improvement in the terms of trade’, that is, a given volume of exports will purchase an increased volume of imports. The increase in the real exchange rate as an improvement in the terms of trade provides cheap imports and reduces inflation, benefiting consumers at the expense of producers, who suffer from the loss of competitiveness.

⁶⁸ Noreng, , The Oil Industry, pp. 211–12.Google Scholar

⁶⁹ Noreng, , ‘Norway’, pp. 85–6.Google Scholar

⁷⁰ Noreng, , The Oil Industry, esp. pp. 211–19.Google Scholar

⁷¹ Leys, C., ‘Thatcherism and British Manufacturing: A Question of Hegemony’, Queen's University, Canada, mimeo, 1985.Google Scholar

⁷² Alt, , ‘New Wine in Old Bottles’.Google Scholar

⁷³ The contrast in recent years between sharp declines in union membership in Standard Industry Class 4 (other manufacturing) and the corresponding increase in class 9 (services, especially in health) is striking. See Department of Employment, ‘Membership of the Trade Unions in 1984’, Employment Gazette, XCIV (01 1986), pp. 16–18.Google Scholar

⁷⁴ Thygesen, N., ‘Exchange-Rate Experiences and Policies of Small Countries: Some European Examples of the 1970s’, Princeton Essays in International Finance, no. 136 (1979), p. 25Google Scholar. See also Gjølberg, O. and Sagstad, K., ‘Forward Rates, Fair Games, Forecasts and Speculation: An Empirical Analysis of the Norwegian Market for Foreign Exchange’, in Anderson, O., ed., Time Series Analysis: Theory and Practice, vol. 3 (Amsterdam: North-Holland, 1983).Google Scholar

⁷⁵ Walters, , Britain's Economic Renaissance, pp. 125–32.Google Scholar

⁷⁶ Hamilton, A., North Sea Impact (London: IIER, 1978), p. 157Google Scholar. See also Walters, , Britain's Economic Renaissance, pp. 134–6.Google Scholar

⁷⁷ Hall, P., ‘The Political Dimensions of Economic Management’, doctoral dissertation, Harvard University, 1982.Google Scholar

⁷⁸ At least while they assume the boom is expected to be temporary, and that decline and later recovery of the traded goods sector would non-optimally decumulate human and physical capital. See Eastwood, and Venables, , ‘The Macroeconomic Implications’.Google Scholar

⁷⁹ One can always argue that this unemployment is an efficient response to the increase in income from oil production and that countries should move into oil-related industries and non-traded goods and forget about their manufacturing sectors. For policy recommendations see Corden, , ‘Booming Sector’Google Scholar, van Wijnbergen, , ‘The “Dutch Disease”’Google Scholar, van Wijnbergen, , ‘Inflation’Google Scholar, and Korteweg, , ‘Exchange Rate Policy’.Google Scholar

⁸⁰ See Steinmo, , ‘The Policy of North Sea Oil’Google Scholar, and Mjøset, , ‘Nordic Economic Policies’.Google Scholar

⁸¹ Noreng, , The Oil Industry, pp. 190–4Google Scholar. There were some other factors in the bargains. For in stance, the EEC referendum loss is alleged to have led the Social Democrats into expansive policies to rebuild a coalition of national unity. These included a commitment to farmers' wage parities, in particular a source of inflationary pressure in the mid-1970s.

⁸² British employers' national insurance (social security) contributions were eventually reduced in the 1982 and 1983 budgets, though slower than requested by the CBI. For the figures see Revenue Statistics of Member Countries, 1975–82 (Paris: OECD, 1984).Google Scholar

⁸³ Isachsen, A., ‘Norwegian Economic Policies in the 1970s’Google Scholar, in de Ceceo, , ed., International Economic Adjustment, pp. 49–64.Google Scholar

⁸⁴ Hamilton, , North Sea Impact, p. 122Google Scholar; Jenkin, M., British Industry and the North Sea (New York: Holmes and Meier, 1981)CrossRefGoogle Scholar, and Steinmo, , ‘The Policy of North Sea Oil’.Google Scholar

⁸⁵ See Moon, J., ‘Policy Change in Direct Government Responses to UK Unemployment’, Journal of Public Policy, III (1983), 301–30CrossRefGoogle Scholar; Richardson, J. and Moon, J., ‘The Politics of Unemployment in Britain’, Political Quarterly, LV (1984), 29–37CrossRefGoogle Scholar; and Richardson, J. and Henning, R., Unemployment: Policy Responses of Western Democracies (Beverly Hills, Calif.: Sage, 1984).Google Scholar

⁸⁶ Schmitter, P., ‘Interest Intermediation and Regime Governability in Contemporary Western Europe and North America’, in Berger, S., ed., Organizing Interests in Western Europe: Pluralism, Corporatism and the Transformation of Politics (Cambridge and New York: Cambridge University Press, 1981).Google Scholar

⁸⁷ Noreng, , ‘Norway’, pp. 82–3.Google Scholar

⁸⁸ Noreng, , The Oil Industry, pp. 188–9.Google Scholar

⁸⁹ Noreng, , ‘Norway’.Google Scholar

⁹⁰ See Ministry of Petroleum and Energy, ‘The Future Extent of Petroleum Activities on the Norwegian Continental Shelf’, Oslo, mimeo, 1983Google Scholar, especially Section 7, ‘Criteria for the Rate of Depletion’.

⁹¹ In its first public document (The Challenge of North Sea Oil, HMSO, 1977)Google Scholar, the Callaghan Government gave priority to industrial investment and restoring industrial competitiveness, while warning against using oil revenues to raise living standards and expand public services. See Hall, , Political Dimensions, p. 579.Google Scholar

⁹² Hamilton, , North Sea Impact, p. 146.Google Scholar

⁹³ The Economist, ‘When the oil runs out’, 9 06 1984, pp. 67–70Google Scholar. Also see Hall, , Political Dimensions, p. 579Google Scholar and Hamilton, , North Sea Impact, pp. 156–7Google Scholar. For instance, a search of Walters, , Britain's Economic RenaissanceGoogle Scholar, reveals only an analysis of whether unemployment arose more (within tradables) from exporting or import-competing industries (pp. 166–70).

⁹⁴ Atkinson, and Hall, , Oil and the British Economy, p. 180.Google Scholar

⁹⁵ Desai, M., ‘Economic Alternatives for Labour 1984–9’, in Griffith, J., ed., Socialism in a Cold Climate (London: Unwin, 1983).Google Scholar

⁹⁶ Atkinson, and Hall, , Oil and the British Economy, pp. 188–92.Google Scholar

⁹⁷ Worse, even if policy could influence international currency markets, there is no agreement among economists on appropriate exchange rate policies towards competitiveness (Corden, , ‘Exchange Rate Policy’Google Scholar). Different specifications of the Dutch Disease effect lead to opposite remedical suggestions, like fiscal contraction (Forsyth, and Kay, , ‘Economic Implications’Google Scholar) or expansion (Eastwood, and Venables, , ‘Macroeconomic Implications’Google Scholar). Many other policy recommendations in the economics literature are ambiguous. For instance, monetary expansion would lower the nominal exchange rate (undoing some overshooting effects) but be inflationary, and possibly (unless accompanied by some fiscal contraction) only increase demand and worsen the disease. On the other hand, monetary contraction would appreciate the exchange rate, worsening the competitive position. The interest equalization tax proposed to make British assets less attractive at any given interest rate dampens the exchange rate appreciation, reducing the decline in competitiveness, but the added fiscal surplus only contributes further to the Dutch Disease. Finally, direct intervention in exchange markets to reduce appreciation produces monetary inflows (see monetary expansion, above) which cannot necessarily be sterilized except by recourse to inefficient foreign investment (Corden, , ‘Exchange Rate Policy’Google Scholar). In any event, such intervention was tried by Labour in 1977–78, and the monetary expansion attendant on the resulting capital inflows swamped their efforts. Non-market ‘solutions’, like investing overseas and not importing the proceeds, or educating a generation abroad and reimporting the value-added as human capital, are similarly lacking in appeal.

⁹⁸ Lange, and Garrett, , ‘The Politics of Growth’.Google Scholar

⁹⁹ Shonfield, , The Use of Public Power, p. 106.Google Scholar

¹⁰⁰ Katzenstein, , Corporatism and Change, p. 91.Google Scholar