Britain is tightening too far

In addition to speaking the same language, the United States and Britain, there are many similarities: both countries have experienced a significant expansion of the family credit; both countries have had to rescue the country's financial industry; regard the two central banks cut rates to near zero and take the "quantitative easing" policy; after the crisis between the two countries have experienced a massive increase in deficit. However, the two countries is now a huge policy differences. British coalition government recently announced the details of government spending cuts. It is expected that the U.S. will not take similar initiatives. In the latest Economic Outlook, the International Monetary Fund (IMF) pointed out the differences. But the bond market seems to have turned a blind eye, at least for now.

we can determine the difference between the two countries after the crisis experience: U.S. gross domestic product (GDP) fell less (peak to trough decline of 4%, while the United Kingdom 6.4%), the unemployment rate were recorded (2007 to 2010, increased by 5%, UK 2.5%) U.S. core inflation rate fell faster than the UK (as of September of the year fell to 0.8%, while the United Kingdom 2.9%), mainly As the impact of sterling depreciation.

However, both countries are experiencing a protracted and frustrating bubble deleveraging and tightening process, the University of Maryland (University of Maryland) ? Carmen Reinhart (Carmen Reinhart) and Harvard ( Harvard) ? Kenneth Rogoff (Kenneth Rogoff) in his book "This is not the same" (This Time is Different) explains this point. Two economies are far from full load operation. Both countries must make a choice: one is the recovery of short-term financial crunch on the risk of large fiscal deficits on the other hand is a more long-term reliability of credit risk. Both countries rely on monetary policy. However, in view of the expected fiscal tightening, the UK is certainly far more than the U.S. dependency.

then why is there such differences? Its impact will be? The extent to which quantitative easing policy will offset these effects? Finally, we can monetary and fiscal policy in the role of each draw what lessons?

first answer is that the euro zone financial crisis shaken the British decision-makers become sober. I always think that the example of Greece and the United Kingdom are very different. Greece does not own central bank, to restore growth prospects bleak. I always thought that the British planned fiscal tightening - cyclically adjusted, the UK will be in five years is equivalent to GDP 8% of the tightening - was overdone. However, the U.S. failed to come up a long time to tighten fiscal policy in a credible way, which is very irresponsible act.

on the possible impact of fiscal tightening, IMF latest World Economic Outlook (World Economic Outlook) provides an incisive analysis. IMF to overthrow the "expansion of the crunch," the argument. It is suggested that previous studies failed to determine the stage of deliberate austerity, but rather focus on a cyclically adjusted deficit reduction period. This is completely different.

analysis of the main conclusions are as follows:

first, accounting for GDP 1% of the fiscal consolidation, often within two years so that the actual domestic demand 1%, GDP fell 0.5%. If so, the British fiscal consolidation will reduce the actual demand, if other factors remain unchanged, the domestic demand will be reduced 8%, GDP will decline 4 percent.

Second, interest rates will usually alleviate these effects. Now that the situation can not be the case. This will increase the cost of fiscal consolidation.

Third, the real exchange rate fell often alleviate this impact. This applies to the UK situation, since the crisis, the real exchange rate pound fell by about 18%.

fourth, compared with the adjustment of tax-driven, relying on spending cuts of more expansionary fiscal contraction. But in part because the central bank's response seems to be more radical.

Finally, in the long run, if other factors remain unchanged, reducing the debt is advantageous because it reduces the real interest rate. Now, in the real interest rate is so low (close to 1%) on the occasion, which is still applicable, in doubt.
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