NIESR: "The financial crisis: one decade on"

2 Aug 2017 01:54 PM

The latest issue of the National Institute Economic Review, to be published on Wednesday 2 August, shortly before the tenth anniversary of the financial crisis, will concentrate on the question of financial stability, with research articles from prominent experts in the field from academia and the City.

The five articles, prefaced by an introduction by Jagjit S. Chadha, are:

  • Monetary Policy Normals, Future and Past, by Peter Sinclair (Birmingham University) and William A. Allen (NIESR)
  • "Sound finances": strategy or soundbite? By Michael McMahon (Warwick University)
  • Building on incomplete foundations: financial stability policy since the crash, by Richard Barwell (BNP Paribas Asset Management and London Institute of Banking and Finance);
  • The financial foundations of the productivity puzzle by Jagjit S. Chadha, Amit Kara and Paul Labonne (NIESR);
  • Medium-run implications of changing demographic structures for the macro-economy, by Yunus Aksoy (Birkbeck College London), Henrique S. Basso (Banco de España) and Ron P. Smith (Birkbeck College London)

In light of the crisis Sinclair and Allen outline the ‘new normal’ in so many of the world’s central banks, and specifically the UK. They provide a wide-ranging examination of the position of the monetary policy framework, instrument settings, the underlying models, unconventional policy measures, real interest rates, and the interface with macro prudential policy, and explore both the advantages and challenges involved in any move to return towards pre-crisis arrangements and an elevation in interest rates. They emphasise the need for coordination across policy arms but also that there are important distortions arising from tax treatment of firm interest rate payment on debt and also on the treatment of imputed rent from households.

McMahon reminds us that a defining feature of (at least) the last three general elections has been the emphasis placed on each political party’s fiscal credibility and their ability to deliver “sound public finances”. The frequently-used metaphor of applying the logic of household book-keeping and balancing the fiscal budget captures such soundness. He argues that there is little evidence that a balanced budget is necessarily sound in all states of nature. Instead, the evolution of public finances depends on (1) both the fiscal choices made on the level of spending and taxation, (2) the underlying growth of the economy, which depends on far more than fiscal decisions, and (3) interest rates on government debt and the financing needs of the government. As the economic situation changes, so too does the likely path of debt to GDP and hence the possible fiscal options open to a country. Sticking to the soundbite of “sound finances” may have distracted attention from the underlying menu of political choices and may be a disruptive narrative in UK.

Barwell argues that a fit for purpose policy regime requires a reliable general equilibrium model of the system in question and a well specified description of the objectives that the policymaker is trying to pursue. The current financial stability regime, which has multiplied quickly in several dimensions without these critical foundations, is fundamentally fragile and incomplete. He argues that the flurry of activity since the crisis has meant that there is no proper anchor on the conduct of financial policy, no possibility of genuine accountability and as a result there are reputational risks for policy institutions.

Chadha, Kara and Labonne document how the financial crisis has led to a change in the mix of capital and labour employed in the UK and a sharp decline in total factor productivity. This has meant that labour productivity has not recovered to any great degree since the financial crisis. They explore the role of overall and sectoral productivity in explaining the fall in labour productivity, but also cast doubt on the measurement of productivity in the service, particularly the financial, sector and also the extent to which intangible capital may be being measured with error. They outline the links between a constrained financial sector and a fall in overall productivity and illustrate how a financial sector providing intermediate services may act to amplify the business cycle impetus from a total factor productivity shock within the context of a calibrated model.

Aksoy, Basso and Smith suggest that in the decade since the onset of the financial crisis, the disappointing recovery has sparked renewed concern about the medium-run outlook for advanced economies. Rather than returning to its pre-crisis trend, output has continued to diverge from it. It is difficult to know whether this is a cyclical phenomenon, which involves a slow recovery towards steady state, or a secular change in the nature of steady state growth: so-called secular stagnation. While there may be an important, but transitory, cyclical component in the poor performance of the past decade, they emphasise the secular forces: the impact of demographic structure and innovation. They highlight the impact of changes in demographic structure on macroeconomic outcomes and suggest that changes in the age profile not only have significant implications for savings, investment, real interest rates and growth but also for innovation.

In a special Notes and Contributions sections at the end of the Review, William A. Allen offers his thoughts on the independence of the Bank of England and Roger Farmer (NIESR) explores six tools available to monetary policy makers.

The Review will also include NIESR’s analysis of the UK and global economic outlook, detailed in separate press releases under embargo until 00.01am on Wednesday 2 August.

Notes for editors:

The freeze of the interbank lending market, which signalled the start of the financial crisis, occurred on 9 August 2007.

Journalists wanting full copies of these papers should please contact the NIESR Press Office: Paola Buonadonna on 020 7654 1923 / /

The National Institute Economic Review is a quarterly journal of NIESR. Published in February, May, August and November, it is available from Sage Publications Ltd ( or at

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