A dynamic model of financial balances for the United Kingdom

[Attention conservation notice: Rampant self-promotion]

Irish economy readers might be interested in this work. Together with colleagues at the Bank of England we’ve built a model of financial balances for the United Kingdom. The basic question we’re trying to answer is: how can large open economies deal with persistent imbalances now and into the future? This is the first model of its kind for the UK and something we hope to build on in the future. We summarise the findings in this Bank Underground blog.


The Nobel Factor

Tomorrow we will know the recipient of the Nobel Prize in Economics. This is not a ‘true’ Nobel, coming some 50 years after Alfred Nobel established the original prizes in physics, medicine, chemistry, literature, and peace. The Swedish Central Bank established the Prize in Economic Sciences in Memory of Alfred Nobel in the late 1960s as a way to counter what it saw as the virulent spread of social democracy across Nordic countries in particular.

The Nobel Factor, a new book by Avner Offer and Gabriel Söderberg, traces the development of the Nobel Prize in economics, which grants authority and ‘Nobel magic’ to economics above other social sciences, and ensures laureates are listened to on every subject. Economics itself is seen as being more scientific, more worthy of the ears of the powerful, as a result of the Nobel prize. The impact of neoclassical economics, the dominant form of economics which emphasises market based interactions above all others on policy makers through teaching and research, is assured because of the Nobel prize.

Offer and Söderberg begin their book with what may well be the best combined explanation, intellectual history, and critique of neoclassical economics and its policy variants I’ve ever read. From there we have a discussion of the social and economic context for the creation of the prize in economic sciences, and an extended discussion of the conflict between free market and social democratic values in the Nordic states in particular. There’s a really interesting series of chapters tracing the evolution of European politics and the individual awards and their subject areas. There’s a great chapter focusing on Assar Lindbeck, a forceful personality and someone who shaped the Prize. 

The story gets a little more complicated once the Prize itself evolves, because it’s not a simple case of rewarding only those who espouse ‘markets are great’ approaches, like Friedman and Hayek. For example in Chapter 7, we learn a lot about empiricists, experimentalists, econometricians and behaviouralists who won the Prize because of their rejection of equilibrium approaches to economics. In Chapter 10, the failure of economics to understand, model, or respond to the growing threats posed by unfettered global capital markets gets a very thorough treatment.

Overall I found the book riveting in that it is written in a deep and scholarly way. I buy the ‘Social Democracy vs Markets’ argument about the genesis of the economics Nobel in the 1960s, but I’m not sure the evolution of the Prize is as clear cut as it could be, after awards to people like Oliver Williamson and Lin Ostrom and Vernon Smith.

The book concludes on a hopeful note. The authors write on page 278:

“To recapture validity, economics has to come down to the ground of argument, evidence, and counterargument, supported by reason and an open mind. In the quest for valid knowledge, for those of Enlightenment disposition, it is well to ignore black boxes, the magic of prizes, and the lure of immutable laws”.

I couldn’t agree more. As intellectual, social, and political history, the Nobel Factor is well worth your time getting stuck into.

My wish for tomorrow’s Prize: Duncan Foley for his work on Public Goods and General Equilibrium, and Charles Manski for his work on just about everything else.

The box below should display the Nobel citation tomorrow around lunchtime.

Three Monday Morning Brexit-Speech Thoughts

Three thoughts after reading the UK Prime Minister’s Brexit speech.

  1. This is the opening salvo of a negotiation. Everything needs to be understood (and therefore, deflated) in this context.
  2. In different places in the speech, Mrs May is talking about restricting immigration *and* having unrestricted free trade. This is a nonsense, and it won’t work. Her description of the process also completely underestimates the negotiating power of the EU. For example, Mrs May said she wants to give “British companies the maximum freedom to trade and operate in the single market”, but not at the expense of allowing free movement of workers for these companies or accepting the power of the European Court of Justice. Best of luck with that.
  3. Beyond rallying the troops a bit, and giving a timeline, there’s little in the speech for Ireland, news-wise, apart from what seems like a very firm decision to negotiate as a United Kingdom–meaning our friends up North and in Scotland are in a bit of trouble as there will likely be fewer border-related concessions for them in the context of a ‘hard’ Brexit.

How much of Ireland’s “fiscal space” will climate inaction consume?

Here’s a guest post on the very important potential fiscal costs of climate mitigation by the IIEA’s Joseph Curtin. 


The basic imperative to reduce emissions is easily understood. From March 2015 to July 2016, in each successive month the previous highest global temperature for that month was broken. July 2016 was the warmest of any month on record in the period of historic measurement. Given this record goes back roughly 160 years, the odds of this occurring without man’s input in the form of greenhouse gas emissions is infinitesimally small.

Reducing emissions is a political challenge that is difficult to grapple with, in Ireland as in many other countries. In welcome developments, we now have a Government Department with “Climate Action” in its title, and the newly established citizens’ assembly was given the goal of exploring “how the State can make Ireland a leader in tackling climate change”.fig1.png

But on the ground there are few examples of “action” and “leadership” to draw upon. There has been no plan to reduce emissions since the previous strategy expired 4 years ago. As we can see from the EPA’s latest inventory report, since the end of the recession in 2011 Irish emissions have more or less flat lined. In fact emissions will probably increased in 2015 (although EPA data have not yet been published) and are projected to continue increasing in the years ahead.

Continue reading “How much of Ireland’s “fiscal space” will climate inaction consume?”