Sterling appreciated sharply between early May and late July. As compared with our May forecast, which assumed the effective index would be about 9 per cent lower than it is currently, our present forecast illustrates the typical effects of a higher exchange rate. The outlook for inflation is improved. Exports are now expected to be lower and consumer spending higher than in our last forecast, a switch in demand particularly unfavourable to manufacturing.

It now seems clear that there was no more than marginal growth in the overall output of the OECD countries in the first quarter. Exceptionally severe weather in Europe and in some areas of the US partly explains the sharpness of the deceleration, its effects being most clearly seen in a 5 per cent fall in construction. But though growth in the second quarter was almost certainly faster, it seems equally probable that there was no very marked rebound. For the first half of the year as a whole the annual rate of increase in industrial production, for example, was probably of the order of 1 1/2 per cent. This compares with as much as 3 per cent predicted by OECD in mid-April.

In this note we discuss the behaviour and determinants of UK imports of manufactured goods, focusing particularly on the period since the end of 1979. The behaviour of imports has important short and long-run implications for the rest of the economy. Attention is frequently focused on imports of manufactured goods and the UK's worsening net trade position in such goods, which has moved from a surplus of about 22 billion in 1982 to a deficit of around £4 billion (or a balance of payments basis) in 1984. One of the outstanding features of import behaviour is the persistent upward trend in the ratio of manufactured imports to ‘final demand’ (chart 1). We hope to throw some light on whether this long-term trend is due merely to increased international specialisation in production and lower tariff barriers or is indicative of an endemic weakness of the UK manufacturing sector in terms of non-price competitiveness.

In many industrial countries regular surveys are published in which either firms or consumers are asked whether they expect some economic variable, like prices for example, to rise or fail. This survey information has been used for many years as an aid to short-term forecasting. Recently there has been a renewed interest in using this data for a rather different purpose: as a measure of firms or consumers' average expectations.

Most economists would doubtless reject the idea that policy makers or the public should judge budgets solely in terms of a single summary concept, surplus or deficit. Yet there is an undoubted demand for a single statistic which provides at least a rough-and-ready summary of the fiscal position. The attempt to specify such a single statistic has given rise to controversy for many years.

Most economists would doubtless reject the idea that policy makers or the public should judge budgets solely in terms of a single summary concept, surplus or deficit. Yet there is an undoubted demand for a single statistic which provides at least a rough-and-ready summary of the fiscal position. The attempt to specify such a single statistic has given rise to controversy for many years.

The central focus of this paper is on the conduct of fiscal policy. But the influence of fiscal policy cannot sensibly be examined separately from other aspects of macroeconomic policy, such as monetary, exchange rate and incomes policies. Because of this, we the opportunity to range quite widely. Two broad themes emerge. The first concerns the consequences of consistent forward-looking expectations for the design of policy. The second concerns the global consequences of adopting generally in many countries policy rules designed in the single open economy context. Since policy appraisal is usually conducted in the single economy context, and policy design with consistent expectations is still relatively underdeveloped, it is useful to take stock of these two issues.

This paper considers two questions related to fiscal and monetary poticy in the United Kingdom. The questions are as follows:

• (i) How do shocks to the economy affect monetary growth?

• (ii) What effects do changes in the debt/income ratio have on the returns to financial assets?

The first question has been previously in relation to the LBS model. The second question has become relevant now that attention is being directed to the possible long-run constraints on fiscal policy. We take the opportunity to study question (i) in response to recent developments of the LBS model. The most significant developments are firstly the incorporation of a model of the financial sector in the LBS model and secondly the ability to incorporate rational expectations into the determination of asset prices in financial markets.