Academic journal article National Institute Economic Review

Appendix A: Summary of Key Forecast Assumptions

Academic journal article National Institute Economic Review

Appendix A: Summary of Key Forecast Assumptions

Article excerpt

The forecasts for the world and the UK economy reported in this Review are produced using NIESR's model, NiGEM. The NiGEM model has been in use at the National Institute for forecasting and policy analysis since 1987, and is also used by a group of about 50 model subscribers, mainly in the policy community. Most countries in the OECD (1) are modelled separately, and there are also separate models of China, India, Russia, Hong Kong, Taiwan, Brazil, South Africa, Estonia, Latvia, Lithuania, Slovenia, Romania and Bulgaria. The rest of the world is modelled through regional blocks so that the model is global in scope. All models contain the determinants of domestic demand, export and import volumes, prices, current accounts and net assets. Output is tied down in the long run by factor inputs and technical progress interacting through production functions, but is driven by demand in the short to medium term. Economies are linked through trade, competitiveness and financial markets and are fully simultaneous. Further details on the NiGEM model are available on http://nimodel.niesr.ac.uk/.

There are a number of key assumptions underlying our current forecast. The interest rates and exchange rate assumptions are shown in tables A1-A2. Our short-term interest rate assumptions are generally based on current financial market expectations, as implied by the rates of return on treasury yields of different maturities. Long-term interest rate assumptions are consistent with forward estimates of short-term interest rates, allowing for a country-specific term premium in the Euro Area. Since the July increase of its official interest rate by 25 basis points to tackle above-target inflation in the Euro area, the ECB has decided to keep its policy rates unchanged due to a deteriorating economic outlook. It has engaged in a new round of long-term refinancing operations and bonds purchase to support financial markets. Meanwhile, weak growth in the UK has led the Bank of England to maintain its interest rate at the record low 0.5 per cent whilst also announcing a new round of quantitative easing, despite escalating inflation. The Bank of Japan has maintained its essentially zero interest rate unchanged in order to support economic growth after the twin disasters of March 2011. The Federal Reserve continues to stress that interest rates in the US will remain low for an extended period, while Canada is also expected to maintain its key interest rate constant, anticipating the deterioration of global growth and the risk that Europe's debt crisis could linger or deepen. In Switzerland, the official rate was cut to 0 per cent to tackle its overvalued currency.

[FIGURE A1 OMITTED]

In contrast, emerging economies are actively battling against strong inflationary pressures, notably coming from high food and oil prices. Many central banks have now increased their key interest rates in order to curb inflation, including the recent increase of the Indian official rate by 25 basis points in September 2011. Yet, Thailand recently decided to keep its rate on hold at 3.5 per cent, after nine successive increases since July 2010, in order to support economic growth after the disastrous flooding. In Brazil, the central bank surprised the market with a sudden monetary policy switch by cutting rates twice by 50 basis points, to 11.5 per cent as a response to lower growth expectations.

Figure A1 illustrates our projections for real long-term interest rates in the US, Euro Area, Japan and Canada. Long real rates followed nominal rates in a sharp drop in the second quarter of 2011 and are expected to continue to fall until the end of the year. The monetary stance will remain expansionary until 2015-16, when real interest rates in North America are expected to stabilise close to historical levels. A somewhat higher level in the Euro Area reflects the risk premium on sovereign debt in Greece, Ireland and Portugal. We see real interest rates in Japan remaining negative for an extended period. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.