Friday, March 5, 2010

The Economy Could Have Been Worse

One of the difficult things in economics is measuring the impact of a policy. For example, you could argue, the UK's recession was one of the deepest in Europe, therefore, this shows the failure of our fiscal policy and Monetary policy which included Quantitative Easing.

However, such as a simplistic conclusion is likely to be misleading. There were several factors that made the recession very deep, and it could have been deeper and more prolonged without the unorthodox policies and unprecedented intervention.

A report by Capital Economics suggests that Quantitative Easing has boosted GDP by 2-3%. That's not much considering it involved £200bn of asset purchases. But, without it the economy would still have been in recession. (link Telegraph)

This indicates that since quantitative easing began last March, banks have hardly been in a rush to increase lending. But, it also means the scale of quantitative easing has created little if any inflationary pressure as some feared.

It would be interesting to see a report on the impact of a record expansionary fiscal policy (budget deficit of 12% of GDP). I would hazard a guess, the budget deficit has had a similar impact on GDP of + 2-3%.

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