Medium Term Financial Strategy Research Articles

Building a Model for Forecasting the Exchange Rate on the Long-term and Short-term Horizons

Forecasting the ruble exchange dynamics appears objectively necessary for shaping both the medium-term financial strategy of industry corporations and the general strategic course for occupying leading positions in sectors of business interest, including through the use of new financial instruments, new markets and, in general, a system of strategic planning of socio-economic development of Russia. However, in today's realities, according to most experts, with whom we cannot but agree, the task of forecasting seems extremely difficult and appears complicated by the fact that the launched crises are unpredictable and are characterized by a diverse nature (pandemic and geopolitical crises, expansion of trade wars and sanctions). In such conditions, when uncertainty grows excessively, it is important to turn to the accumulated experience: to analyze to what extent the available models can be suitable for prospective assessments in the current environment.

Построение модели прогноза курса валют на долгосрочном и краткосрочном горизонтах

Forecasting the ruble exchange dynamics appears objectively necessary for shaping both the medium-term financial strategy of industry corporations and the general strategic course for occupying leading positions in sectors of business interest, including through the use of new financial instruments, new markets and, in general, a system of strategic planning of socio-economic development of Russia. However, in today's realities, according to most experts, with whom we cannot but agree, the task of forecasting seems extremely difficult and appears complicated by the fact that the launched crises are unpredictable and are characterized by a diverse nature (pandemic and geopolitical crises, expansion of trade wars and sanctions). In such conditions, when uncertainty grows excessively, it is important to turn to the accumulated experience: to analyze to what extent the available models can be suitable for prospective assessments in the current environment.

PENDAMPINGAN PENGELOLAAN KEUANGAN DAN PENYUSUNAN LAPORAN KEUANGAN BERBASIS ANDROID PADA UMKM KELURAHAN MANGUNHARJO KECAMATAN TEMBALANG KOTA SEMARANG

Despite its large contribution to the economy, MSMEs players face various problems, including access to capital, poor financial management and the absence of an adequate medium and long term financial management strategy.
 This community service is carried out with the general objective of empowering Micro, Small and Medium Enterprises to be able to survive and develop with their own uniqueness. The specific objectives of this activity are for the target MSMEs to have adequate financial management and for the target MSMEs to be able to prepare simple financial reports.
 The existence of a pandemic has made mentoring activities carried out online with a zoom platform. Financial management assistance is provided by providing some knowledge / skills related to financial management, especially during times of crisis. The accounting system used uses a mobile application platform in collaboration with the Indonesian Institute of Accountants which is available for free at the appstore, namely Si Apik.
 Activities of assistance in financial management and preparation of android-based financial reports for MSMEs are very beneficial. Assistance activities are very useful and practical for MSME entrepreneurs. Assistance needs to be carried out continuously to instill a good accounting and financial mindset in the management of MSME business finances.

The Monetary and Fiscal Policies of Early Thatcherism and the Legacy of the Medium Term Financial Strategy

This contribution re-examines the Medium Term Financial Strategy which the first Conservative government (1979-1983) adopted as a framework for implementing its monetary and fiscal policies. Conceptually monetarist, the MTFS progressively gave way to more traditional considerations of controlling public spending, though the 1981 Budget sought to combine monetarist zeal and a tight grip on finances in the middle of a major recession. Accordingly, the MTFS and this Budget definitively marked the final break with post-war Keynesian demand management. The MTFS was controversial at the time and its legacy is still disputed. The contribution reviews the MTFS in the light of the release of Cabinet papers and other recent accounts of witnesses who shaped policy. It also looks at what the impact of the MTFS was on monetary policy in the following years, and how even today the memory of the 1981 Budget is still shaping Coalition and Conservative government policy.

The Rise and Fall of Thatcherism*

Abstract The ‘battle of the books’ conducted in memoirs of the Thatcher government can yield valuable historical insights. ‘Doctrinal Thatcherism’ is examined, especially the proclaimed filiation of the Medium Term Financial Strategy from Friedmanite monetarism. This is shown to be somewhat uncertain either in theory or in practice. Yet the ability of Thatcherism to withstand such frailties proved it ideologically robust in both objectives and methods. If its appeal was crucially dependent on the personality of Thatcher herself, her fall was likewise irreducibly personal, as illustrated in her handling of the poll tax and of her relations with key colleagues.

The post-ERM Framework for Monetary Policy in the United Kingdom: Bounded Credibility

Since the United Kingdom center the Exchange Rate Mechanism (ERM) of the European Monetary System in September 1992 the monetary authorities have constructed an alternative framework for monetary policy which involves a new inflation target and a greater degree of autonomy for the Bank of England. This paper assesses the new framework by examining what it consists of and the way in which it appears to have operated so far, against the background of the problems previously experienced with monetary and exchange rate targets. Section II provides some background information. Section III explains the new framework for policy constructed in the aftermath of the sterling crisis. Section IV offers an evaluation of that framework. Section V presents the conclusions. The new framework follows a period during which both monetary and exchange rate targets had been tried, but had been seen to have failed. Monetary targets were introduced in the United Kingdom during the sterling crisis of 1976, and given greater importance in the Medium Term Financial Strategy from 1980. However, there were repeated overshoots of the targets, particularly during the 1980s, partly as the result of external factors – velocity and other shocks, partly driven by financial innovation – and partly because the authorities themselves chose the target ranges ex ante in arbitrary ways (Cobham, 1989). At the same time their ability to control monetary growth was weakened by the abandonment of the corset in 1980 and the technique of overfunding in 1985, the effects of both of which had been to some extent cosmetic in any case. Monetary targets were therefore abandoned, in practice in 1985 and formally in the 1987 Budget.

IS THERE A CASE FOR THE MTFS?

This paper offers a critique of the macroeconomic policy stance of the U.K. Conservative administration from a policy optimization perspective. Attention is focused on three particular issues which, it is argued, require clarification in the medium term financial strategy. The first concerns the role of nominal GDP; the second is concerned with whether output is an objective of policy alongside inflation; the third concerns the role of fiscal policy. The costs and benefits of the approach taken in the current medium term financial strategy are illustrated empirically using the National Institute macroeconomic model.

Explaining Price Inflation in the UK: 1971-92

The late-1950s and 1960s were, by recent standards, a period of low and stable inflation11'. Since then, however, inflation has been both higher and more volatile peaking above 24 per cent in 1975 in the wake of the quadrupling in the world price of oil. As a consequence, the control of price inflation has become a central concern of macroe conomic policymakers. In the 1970s, the policy response was often to rely on some form of direct control of prices and earnings through incomes policies. By contrast, the Conservative administration from 1979 onwards eschewed all forms of market interference instead relying on the more explicitly macroeconomic policies of monet ary control. At first, these took the form of announced targets for the broad monetary aggregates (initially £M3), but through the 1980s the specification of the Medium Term Financial Strategy (MTFS) evolved to allow a more flexible assessment of 'monetary con ditions' which allowed a wider range of indicators to be monitored. Nevertheless, the primary aim of policy remained the control of inflation. The commitment of sterling to the exchange rate mechanism in February 1990 was a logical extension to this approach. The fail ure to maintain this policy is, by now, well known and the subsequent relaxation of policy in the wake of ERM departure has clearly represented a shift in emphasis away from pure inflation targeting towards a more active concern for the maintenance of output. Nevertheless, recent policy statements, in particular with the announcement of an inflation target of 1-4 per cent for the forthcoming year, have been at pains to preserve the role of the inflation objective in the overall policy framework. If inflation is to play such an important role in the policy framework, it is crucial to be able to explain its behaviour. The objective of this note is to do this by employing the system of estimated wage and price equa tions embodied in the National Institute macroeconomic model. Obviously, inspection of the individual equations alone cannot tell the whole story since wages and prices are simultaneously determined. Consequently, one needs to derive the reduced form of the wage-price system in order to decompose the explanation of the inflation path into contributions from each of the explanatory variables and residuals in the system. We adopt a similar method ology to that described for the Treasury model in Rowlatt (1993) although our analysis differs in an important way because of the forward-looking nature of our system. As in this previous exercise, our explanation of inflation concentrates on its proximate causes, since we treat all the non-price variables, e.g. unemployment, world prices, capacity utilisation, as exogenous to the wage price system despite the fact that many of these are endogenous in the full Institute model. This will tend to overstate the predictive power of the complete model and indeed, on this basis, the short term forecasting ability of the system is fairly accurate. This is especially the case if we assume that the lagged value of inflation is known. It is more informative, in seeking to 'explain' the prevailing rate of inflation, if we decompose both the lagged and contemporaneous effects into the 'quasi-exogenous' fac tors. This allows us to decompose the historical trajec tory of inflation into those effects arising from world price movements, domestically generated influences and an unexplained category. The plan of the rest of the note is as follows. First, we briefly describe the main measures of price inflation and how differences in definition have recently caused vari ations amongst the most commonly adopted inflation measures. We describe an underlying measure of inflation which largely resolves these definitional differ ences. Secondly, we describe the wage-price system of the National Institute model, with particular reference to the theoretical framework of imperfect competition in goods and labour markets. Finally, we conduct a diagnostic breakdown of inflation conditioned on the variables used in the wage and price equations.

The Mid‐Term Financial Strategy

My title is chosen because of the high weight given to political considerations in the reception of the 1990 Budget, and possibly in its planning as well. In this paper I shall discuss the position of the economy at the present time in relation to the trade cycle and also to the electoral cycle. I hope to show that the two cycles are not in fact as closely related to each other as the American theory of the political business cycle has led some commentators to suppose. In the second half of my paper I shall try to tackle the most important issue of the medium-term financial strategy, which the Chancellor, for political reasons, has been obliged to neglect-that is, the crucial issue of Britain's relationship with the rest of the European Community.

The MTFS or the EMS: Which Way for Credible Monetary Policy?

Since the latter part of 1988, the primary policy objective has been to head off a rise to double digit inflation. To this end, interest rates have been raised from 7112 per cent to 14per cent, while the public sector is running a large fiscal surplus. Despite this apparently very tight policy stance, policy is deficient in a crucial respect: it lacks credibility. The all too public divisions within government have weakened the efficacy of monetary policy, especially in financial markets. The ongoing uncertainty over who is in charge of the conduct of policy ‐ No. 10 or No. 11 ‐ further undermines confidence. The most urgent priority must be to reassert clear priorities and guidelines.In this Viewpoint, we consider how best to restore the credibility of monetary policy. There are two main possibilities: first, to reassert the Medium Term Financial Strategy (MTFS) in an appropriate form; or to join the (Exchange Rate Mechanism of the) European Monetary System (EMS). We argue that it will be very hard to derive credibility benefits from a reassertion of the MTFS: because of the inflation record of the past decade and the twists and turns of past versions of the MTFS, a mere restatement will not resolve the uncertainties that result from known differences within the government. In particular, any restatement will rely on discretion and judgement in its implementation and this will weaken its beneficial effects on expectations.Instead we argue that entry into the EMS offers a tougher and more credible commitment for monetary policy. The Chancellor has been pushed to rule out UK entry until the second half of 1990 at the earliest, but the government should make a virtue of this by announcing a firm dale for entry next year. In the interim, it should encourage a debate about the appropriate rate for entry, a debate which will increasingly guide the foreign exchange market. The government should make it clear that in choosing this rate it will do so with the commitment to low inflation very much in mind, favouring a high exchange rate. Once in the EMS, the government should rule out the possibility of devaluing the pound in an EMS realignment. This provides a firm non‐ discretionary anchor for both monetary policy and inflation expectations. With this commitment, the principal gain from EMS entry will be establishing a regime of low inflation for the next decade: in this, choice of the exchange rate will be less crucial than the fact of entry.

Le modèle britannique (1979-1986)

Since 1979 a monetarist macroeconomic policy has been conducted in the United Kingdom. Defined by the conservative governement as soon as it came into power, the medium term financial strategy (M.T.F.S.) has so changed, at least theoretically, the nature of the economic policy since the Second World War. This article tries to analyse this strategy. It presents its logic, the main policies used, the obstacles they «faced» and the results they attained. This leads to two main conclusions. First, the strategy could not be considered as a pure illustration of the monetarists "remedies": the strict application of the M.T.F.S., which was claimed by the Chancellor of the Exchequer, turned into a very "pragmatic" form after the first years of government meanwhile the economic datas were not consistent with the monetarist theory. Then, the results of this policy appear unclear. On the one hand the growth has been faster than before, the inflation has been lowered and the current account, traditionally negative, has shown a surplus but, on the other hand, the M.T.F.S. has dramatically increased the unemployment during the first years of its application and, despite the recent improvement observed, does not seem to be able to reduce the high level of British unemployment

Public Sector Borrowing and the Public Sector Balance Sheet

In his Budget Statement this year the Chancellor restated his medium-term financial strategy (MTFS) and in particular his objectives for the public sector borrowing requirement (PSBR). He said, ‘Since its inception in 1980 the MTFS has indicated a steadily declining path for the PSBR expressed as a percentage of GDP. We have now reached what I judge to be its appropriate destination: a PSBR of 1 per cent of GDP. My aim will be to keep it there over the years ahead. This note considers the implications of that scale of borrowing for the balance sheet position of the public sector. We are able to do this with more confidence thanks to recent publication by the CSO of new figures for the balance sheet positions of all sectors of the economy up to the end of 1985. Prior to that publication, the latest figures available for the overall balance sheet position of the public sector had referred to 1975. The new data modify the picture of recent trends, without changing their character fundamentally.

The Nominal Framework for Economic Policy

The next Budget will almost certainly be the last one before a General Election. Despite the temptations to make electorally attractive cuts in income tax or increases in public spending, we believe the opportunity should be taken to re‐affirm the government's intention to move steadily towards price stability. This is particularly important at a time when our exceptionally high real interest rates may reflect fears about a future change in policy. We provide a nominal framework which extends the Medium Term Financial Strategy to 1992–3. Given the buoyancy of revenue and the likely growth of money GDP next year, we argue that the PSBR should be no higher than £6bn next year. There is a good case for keeping it at this year's expected level of £5bn.

Implementing Economic Policy: An analytical framework

The article presents an analytical framework developed to aid research into the implementation of the Thatcher government’s Medium-Term Financial Strategy (MTFS). The framework utilises the growing literature on the analysis of public policy in a way intended to be relevant to the study of the implementation of economic policy in the UK. Section one deals with the definition of the terms policy and implementation. This is followed by a section which sets out the assumptions which underlie the framework. The framework itself consists of six elements: the antecedents of policy; dramatis personae; policy standards and objectives; negotiation and conflict; implementation influences on policy and wider societal actors. Throughout the article examples from research into the MTFS are introduced to assess the value of theories drawn from the literature.

The interpretation and use of economic predictions

Treasury forecasts, both published and unpublished, of GDP and retail prices are analysed with reference to average absolute forecast errors and a benchmark index of variation. Forecasts of both GDP and the RPI looking two years ahead have become more accurate since the early 1970s, but there has been no marked improvement in one year ahead forecasts. The accuracy of annualized forecasts of GDP improves, and that of the RPI forecasts deteriorates, as the forecast time horizon is progressively extended from one to eight quarters ahead. Some evidence of forecast bias is presented ; in the period up to 1979, GDP tended to be over-predicted, and inflation under-predicted. Since 1980 this pattern has been reversed. Analysis of Treasury forecasts and an average of U. S. forecasts shows them to be about equally accurate. The role of forecasts in the implementation of economic policy is discussed. Systematic model-based forecasts provide a consistent framework of analysis, which can improve the operation of economic policy. But prediction errors, and the inertia of the economy, imply that there is only limited scope for discretionary, forecast-based, stabilization policy. Under the medium term financial strategy, MTFS, the policy emphasis has shifted to the medium term. The forecasts have been used to articulate assumptions for output, inflation and money GDP, and to provide the tax and expenditure framework behind the illustrative path of the PSBR. Without the forecasts, the conduct of monetary and fiscal policy would have been considerably more difficult. The paper concludes that, while reductions in the forecast errors of short-term forecasts may be difficult to achieve, there is hope that the accuracy of longer-term forecasts may continue to improve.

FOOLING ALL OF THE PEOPLE

The public's expectations about government policy are a key influence on the economy and can be more important than the policy itself. By allowing the public to know that it is considering reflation outside the Medium Term Financial Strategy, the government is reducing the credibility of the MTFS. This Forecast Release draws on some of the latest developments in economic theory, in the field of ‘time inconsistency’, to argue that the early years of the MTFS suffered from continuing but incorrect expectations that the policy would be abandoned. To avoid repeating this mistake, the government should promptly concede the current calls for reflation if it is unable to resist them, although a preferable outcome for unemployment and inflation can be achieved by re‐affirming the MTFS. A worse outcome than either of these is obtained if the government continues with the MTFS while leaving open the possibility of a sudden reflation.

THE ASSESSMENT: MONETARY AND FISCAL POLICY IN THE 1980s

The emphasis is on policy in the UK, though many of the issues that arise e.g., about the links between monetary and fiscal policy, or the concern over persistent deficits and debt are general, being faced by other countries as well. The UK's policy has, however, been more extreme and, under the Medium Term Financial Strategy (MFTS), more explicit than elsewhere. The purpose of this Assessment is not primarily prescriptive: rather it is an alytical, intended to lay out some of the major theoretical and empirical issues that underlie policy choice and to stimulate debate.

The Treasury and Britain's Decline

This article concentrates on explanations of Britain's economic decline which highlight the role of the Treasury. There is inconclusive evidence that stop-go financial policies and low investment have contributed to low growth. It is argued that foreign economic policy delayed the modernization of the economy. Although officials influence day-to-day strategy and the creation of instrumentation, the collegiate nature of decision-making means that civil service influence is hard to assess. The Treasury is constrained by pressure groups and by other departments in Whitehall. These constraints are examined with reference to the Medium-Term Financial Strategy. Finally, there are long-term reasons for Britain's decline and these do not originate in any one institution. It is not possible to analyse the role of the Treasury in isolation.

Assumptions–Central Forecast

We continue to make our best guesses about likely policy developments rather than assuming ‘unchanged’ policies. In the central forecast we assume that the broad thrust of policy is unchanged, i.e. we have made the technical assumption that the present government is returned in the next General Election. But, because an election must be held within the next 15 months, we also consider the medium‐term prospects under alternative economic policies. (For details see p. 19.) In the central forecast. e herefore. we assume that policy will continue to be guided‐though not completely determined‐by an extended Medium‐ Term Financial Strategy (MTFS). For 1983‐4 the MTFS requires the PSBR to be 23/4% per cent of GDP at market prices. Given official inflation and output forecasts, the Chancellor is therefore aiming for a 1983‐4 PSBR of £8bn (Autumn Statement, p. 13). In the central forecast. however, we have assumed that the Budget of 15 March will give greater weight to the political objectives of cutting income tax and maintaining the attack on inflation, even if this implies slippage from the MTFS targets. Specifcally we have assumed that the standard rate of income tax will be cut by lp. that personal tax allowances will be raised by 12 per cent and that indirect taxes will be raised by only half the amount required for full revalorisation. This amounts to a total tax giveaway (compared with unchangedpolicy) of £1 1/2 and results in a PSBR of just over £9bn. 3.1 per cent of GDPat market prices.

Assumptions

We continue to make our best guesses about likely policy developments rather than assuming ‘unchanged’ policies. In particular we assume that the Budget in the spring of 1983 will give greater weight to the political objective of cutting income tax than to maintaining the fiscal and monetary limits set by the Medium‐Term Financial Strategy (MTFS). We therefore expect the PSBR, after falling below the planned level in the current financial year, to rise above the target jigure in the 1983‐4 and 1984‐5 financial years. We expect sterling M3 growth to mirror this and to be siightly below the upper end of its target range for the current financial year, slightly above in the following two financial years. The MTFS does not cover the period beyond 1984‐5. We assume that the broad objective of reducing the PSBR is continued in 1985‐6 and 1986‐7. despite the expected overshooting of targets in earlier years.