Modern economic theory gives an important role to expectations as an influence on outcomes. This paper reviews evidence on how well measures of expectations conform to outcomes. It confirms earlier results that measures taken from financial markets perform poorly as predictors of outcomes. Looking at the individual responses to the Confederation of British Industry’s Industrial Trends Survey, it does find, however, that there are significant correlations between expected and realised outcomes of wages, prices, costs orders and employment. It also finds some evidence that actual prices reflect expected future prices, but with a coefficient much lower than economic theory predicts. There is evidence that forecast errors are explained by past forecasts, as well as revisions to the economic outlook, casting doubt on the idea that firms’ forecasts make the best use of the information available at the time. The paper concludes by observing that, while expectations are undoubtedly important, economists need to build on work looking at how they are derived instead of simply assuming they are rational.

This paper explores the extent to which annuitants might be prepared to pay for protection against cohort-specific mortality risk, by comparing traditional indexed annuities with annuities whose payout rates are revised in response to differences between expected and actual mortality rates of the cohort in question. It finds that a man aged 65 with a coefficient of relative risk aversion of two would be prepared to pay 75p per £100 annuitised for protection against aggregate mortality risk while a man with risk aversion of twenty would be prepared to pay £5.75 per £100; studies put the actual cost at £2.70–£7 per £100, suggesting that unless annuitants are very risk averse it is likely that existing products tend to over-insure against cohort mortality risk.

This article uses a dataset covering ten advanced economies (Australia, Belgium, Canada, France, Germany, Netherlands, Norway, Sweden, United Kingdom and the United States) to explore the role of real wages as an influence on employment and unemployment in the Great Depression and more generally in the 1920s and 1930s. The distinction between employment and unemployment movements during the Great Depression helps to clarify the role of supply side influences on the national heterogeneity of unemployment increases during the Great Depression. We find little general econometric evidence for the idea that movements in product wages had strong influences on employment either during the period of rising unemployment associated with the depression of the 1930s or more generally with the data which exist for the 1920s and 1930s.

This article compares the performance of the UK economy since 1997 with that between 1979 and 1997 and with the performance of the other G7 economies in both periods. It concludes that Britain has done relatively well in terms of productivity growth, economic growth and national income per head but not very well in terms of labour market performance. Savings rates were too low to deliver sustainable economic growth over the period 1979–97 and there has been very little improvement since then. The performance of the economy during the recession and its immediate aftermath has been disappointing relative to the other G7 economies.

When protection is discussed people normally have policies designed to restrict imports in mind. But the way in which the international economy has been affected by toxic financial assets issued in the United States suggests that countries might face problems not only because of the goods and services trade but also because of the financial assets they import. Thus, in discussing the case for protection, we consider first whether there is a case for protection to prevent economies importing some types of financial instrument and, secondly, whether there is a case for more traditional protection as a way of resolving the global imbalances of the world economy. We conclude that financial protection is a sensible way for countries to protect themselves from risky assets if the production and testing of such assets is not regulated internationally.

Most discussion of the Government's fiscal position seems to focus on the immediate risks associated with a rising national debt. There is concern that the UK's credit rating will be reduced and fear that this might lead to a further fall of the exchange rate. It is sometimes suggested that if the budget deficit is not reduced sharply in the reasonably near term there will be a significant risk that the UK might default on its debt.

In the UK already bad output figures for the first quarter were revised down in June to show a contraction of 2.4 per cent. While the national accounts indicate a larger fall (2.6 per cent) for the second quarter of 1958, methods of measurement were then different and it is probable that, were current statistical techniques used for the whole of the ONS quarterly data set which starts in 1955, the first quarter of this year would be the sharpest output fall recorded. It was probably the worst quarterly economic performance in the UK since the 1926 General Strike.

When the Government adopts a fiscal policy framework and target structure, as the current Government did in 1997, there is only limited interest in criticism of the policy framework itself. Inevitably much more attention focuses on whether the Government's targets will be met, rather than on whether those targets are the right targets; this is a simpler focus for debate.

Over the past twenty years the expansion of the British economy has been supported by growth in the financial services industry. With the onset of the financial crisis it seems most unlikely that the financial services industry can, in the future, act as the sort of motor of growth that it had done in the past. This commentary provides an overview of the role of the financial services sector in the economy over the past twenty years and assesses likely developments in the future. It first assesses the contribution of the sector to the economy and then considers the issues surrounding its likely shape in the future.

One might expect bank borrowing to rise during a recession as businesses seek extra credit to tide them over; the data have to be seen in this context. Indeed, in the 1990s recession lending by banks adjusted for inflation continued to rise (with one interruption) until almost the end of the recession. However, recently lending to UK businesses has been declining, as figure 1 shows. This indicates lending by UK and foreign banks to non-bank businesses with data available up to the end of the third quarter of 2008 after deflating with the GDP deflator.

The Government, when it came to power in 1997, adopted a monetary and fiscal policy framework which was intended to deliver low and stable inflation, high and stable economic growth and fiscal balance as a basis for fairness between generations. It is abundantly clear from the chaos of the past few weeks that the policy has failed. Given that the policy goals are unlikely to be criticised, the question addressed here is which parts of the policy need replacing or augmenting.

The sharp rise in the real price of oil has taken it up to or above the levels seen after the second oil crisis of the late 1970s (depending on the currency considered) and has been, to say the least, somewhat disruptive to a world which had anticipated relatively cheap oil, probably for the indefinite future. At the very least, it is hard to imagine that some major consuming countries would have saved as little as they did, had they given proper attention to oil's status as an exhaustible resource. In this commentary the current situation is viewed from that perspective. The short-term impact of high oil prices is discussed on pp. 34–8.

The past few weeks have seen an intensification of the banking crisis in the United States, with the near failure of Bear Sterns, although some commentators hopefully say that the worst has now passed. In the United Kingdom the gap between the Bank Rate and money market rates has re-opened and is described as indicative of a reluctance of banks to lend to each other. In this commentary we seek to explain the fundamental factors behind recent developments in UK lending markets. We begin by describing the recent experience of the financial services industry in the United Kingdom and putting the crisis, which has been described as the worst since the Second World War, into some sort of perspective.

September brought the United Kingdom its first mass market bank run. Although there had been bank runs in the nineteenth century, with the last in 1866, very few people then had bank accounts so the runs were not in any sense comparable with what happened to Northern Rock, which showed a failure of mass retail banking.

The July interest rate increase has taken the Bank of England's Base Rate to the highest value for six years. In figure 1 we show the forward estimates for the nominal short-term interest rate taken from the Bank of England's yield curve tables for both government debt and liabilities of commercial banks. These are in effect market forecasts of the short-term rate produced in the past. The graph shows that the market has been taken somewhat by surprise by rising short-term interest rates. Two years ago the market was forecasting a rate of around 4 per cent per annum for July 2007. Nor were the probabilities the market gave to an interest rate of 5.75 per cent per annum very high. Twelve months ago the market in financial options implied that the chance of the rate exceeding 5.66 per cent per annum was only 15 per cent. Even in January of this year the chance of it reaching its current level or higher was put at less than 25 per cent. The National Institute cannot claim a substantially better record at forecasting interest rates. We normally use market expectations, as calculated from the yield curve, to provide exogenous forecasts as input into our model in the short term.