Economics
Oil price shocks, inflation targeting and game theory We are at the cusp of another cost-of-living crisis, as a result of the Middle East conflict. The conflict is the latest reminder how important oil and derivatives such as fertilisers are for our economies. Central banks face a dilemma with inflation picking up and growth slowing. Governments are considering expensive support packages, adding to the already substantial fiscal pressures.
Oil price shocks have been massively disruptive and transformative in the past. The 1970s and early-1980s were shaped by two major oil crises, the second due to the Iranian Revolution in 1979 (there is a pattern…), which led to a global recession (GDP dropped by 2.1% in the UK in 1980) and eventually the Latin American debt crisis. They also had a big impact on policy making.
The “great inflation” in the US in the 1970s eventually led to a massive policy shift (the “Volcker Shock”), with the Fed and then other central banks concentrating on price stability, paving the way to central bank inflation targeting later as we know it today.
The oil crises also changed how economists think about cartels and market structures. OPEC – the Organization of the Petroleum Exporting Countries – played a major role in these events, keeping a firm grip on global oil supply and controlling prices. OPEC members are stuck in a classic prisoner’s dilemma. But times are changing, with the United Arab Emirates announcing its departure from OPEC in mid-April. Will the latest crisis have a similarly profound impact on economics? We will have to wait and see.
Rogernomics and structural reform Adding ‘nomics’ to just about anything has become very popular in recent years (think Freakonomics, Soccernomics, Angrynomics …) but in terms of adding it to a name ‘Rogernomics’ was coined for Roger Douglas New Zealand MP and Finance Minister back in the late 1980s. Rogernomics was used to describe his economic reforms which involved deregulating markets and were notable for their breadth and speed. Structural reform is never easy and sometimes a time of ‘crisis’ tends to be the moment when things get done. For the ‘Rogernomics’ approach to structural reform see 10 tips from Roger himself Ten principles of structural policy reform. With leadership challenges back in the press and calls for bold visions Roger was nothing if not bold!
2026 Green Book The latest Green Book was launched earlier this year – see Green Book. It is admirably shorter (40% according to the HM-Treasury Press Release ) and is certainly an accessible read. In line with previous editions, the latest Green Book guidance is promoted as key to more balanced investment across the country and Chancellor Rachel Reeves describes the changes as groundbreaking reforms. The type of investment decisions that could see genuine improvements in regional performance will require a little more than another edition of the Green Book though. In the meantime, eyes out for the next announcement on discount rates. As discussed previously, HM Treasury has launched a review of discounting and new place-based business cases are also promised.
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