United Kingdom: Recent Economic Developments

This paper reviews economic developments in the United Kingdom during 1991–95. Following a brisk expansion in 1994, when the economy achieved a rare combination of above-trend output growth and historically low inflation, the pace of economic activity in the United Kingdom has moderated in the course of 1995. Real GDP growth picked up to an annual rate of 4 percent in the first half of 1994, moderating to 3½ percent in the second half. Real GDP growth slowed further to just more than 2 percent in the first half of 1995.

Abstract

V. The Output Gap and Inflation ^1/

This chapter focuses on the relationship between the output gap and the rate of inflation, and in particular in documenting the “speed limit” effect (i.e., the relationship between changes in the output gap and inflationary pressure).

1. Defining the “speed limit” effect

The conventional approach to explaining inflation in industrial countries relies on the concept of the output gap, namely, the extent of slack available in an economy as represented by the excess of potential capacity with respect to actual output. On this approach, a positive (negative) output gap--i.e., actual output above (below) potential--indicates an excess of aggregate demand (supply) and will tend to increase (decrease) the rate of inflation. An elaboration of this approach is to include also the change in the output gap as a determinant of inflation. Positive (negative) changes in the output gap represent a reduction (increase) in the degree of slack and that on its own will stimulate (subdue) inflationary pressures. Under this formulation the inflation rate can be represented by:

\begin{matrix} π = β_{1} g a p + β_{2} Δ g a p + o t h e r t e r m s & (3) \end{matrix}

where π is the rate of inflation, gap is the output gap and Δgap is the change in the output gap. ^2/

Isolating the two effects of the output gap on inflation, it is possible to define a trade-off between the gap level and its change such that, ceteris paribus, the inflation rate is equal to the contribution arising only from the other terms:

\begin{matrix} Δ g a p = - \frac{β_{1}}{β_{2}} g a p . & (4) \end{matrix}

This trade-off defines a “speed limit”, that is, a change in the output gap such that the inflationary (deflationary) effects from the gap change are fully offset by the deflationary (inflationary) effects from the gap level term. In order to calculate the “speed limit”, inflation equations were estimated.

2. Estimating the inflation equations

An inflation equation equivalent to equation (1), was estimated. The dependent variable was the RPIX (denoted as PX), estimated as a function of the output gap (YGAP), import prices (PM) and unit labor costs (ULC). ^1/ Quarterly data for the period 1982-94 were used in estimating the inflation equations.

Before estimating the inflation equations, the time-series properties of the different series were studied for the 1976-94 period. Dickey-Fuller (DF) and Augmented Dickey-Fuller (ADF) tests confirmed that the log of RPIX, import prices and unit labor costs contain a unit root (Table 5.1.) The first differences of these variables appear to be stationary, although ADF tests ran with two and three lags did not reject the null hypothesis of a unit root in the log difference of unit labor costs. At the same time, the ADF unit root test (with three lags) corroborated what is true by construction, namely that the output gap is stationary in levels.

Table 5.1.

Unit Root Tests, 1976-94.

The fact that the three price indices appear integrated of order one leads to the natural possibility that they are cointegrated. The existence of a long-nan relationship between retail prices, import prices and unit labor costs was the basis for the static equation in an earlier model. ^2/ This issue is explored in Table 5.2, where the Johansen maximum likelihood method is pursued. F-tests on retained regressors suggested that the suitable lag-length was only two lags for the system. Both the trace statistic and the maximum eigenvalue statistic rejected the null hypothesis of a zero rank for the long-run matrix, but failed to reject the null of a unitary rank--indicating a single cointegrating vector for the system.

Looking at the first eigenvector--standardized on LPX--suggests the possibility that the coefficients on import prices and unit labor costs add up to one. In other words, the system displays static homogeneity in prices. This restriction was imposed and tested for in the lower panel of Table 5.2, after imposing a unitary rank for the long-run matrix. A likelihood-ratio test did not reject the imposed restriction of static homogeneity (x² of 2.6). Interestingly enough, the share corresponding to import prices in the cointegrating vector (0.286) is estimated to be substantially higher than previous estimations. ^3/ On the basis of this restricted cointegrated vector, an error correction was calculated (and denoted by ecpx) to be included in the estimation of the inflation equations.

Table 5.2.

Cointegration Analysis, 1975-94

Two methods were used in the estimation of the inflation equations: Recursive Least Squares and Recursive Instrumental Variables. The latter takes into account possible endogeneity of right-hand-side variables. In particular (as in the earlier version of the model), unit labor costs were instrumented with a mismatch variable based on the ratio of vacancies to unemployment (MMV), retail prices (P), average underlying earnings (W), the unemployment rate (U), whole-economy productivity (PR) and lagged unit labor costs. After numerous specification searches, the final version of the estimated inflation equations for 1982-94 are presented in Table 5.3.

Table 5.3.

Inflation Equations, 1982-94 Dependent variable: D4LPX

Overall, the inflation equation estimated by RLS appears quite satisfactory: all the variables have the expected signs and most of them are significant at conventional significance levels. Moreover, the fit of the equation is remarkable, as verified by the large R² and the plot of the actual and fitted values (Chart 5.1). All the diagnosis tests suggest that the specification is rather acceptable (displaying perhaps some autoregressive conditional heteroskedasticity). The RIV estimation yields roughly similar results, although the specification test suggests that the structural model may not encompass the unrestricted reduced form.

The recursive estimates of the RLS coefficients throw additional information, especially with respect to the period 1990-92, which corresponds to the period during which sterling was part of the ERM (Chart 5.2). Although almost all coefficients ended-up significant when the whole 1982-94 sample period was used in their estimation, during 1990 most of the coefficients showed marked instability in their estimated values. For example, the coefficient corresponding to the lagged inflation rate jumped from around 0.4 to 0.5, and similar behavior is observed in the case of import prices. The coefficients on the error correction term, unit labor costs (lagged four periods), and the output gap change displayed lower estimates, while the one on the lagged value of the output gap increased its standard error to become insignificant.

The possibility of a structural break around 1990 is reinforced by the behavior of one-step recursive residuals and Chow tests (Chart 5.3). Therefore, the models were estimated again for the period 1982-89 (Table 5.4.). Not surprisingly, the models display a better fit and specification over this restricted time period. As a further check on the possible structural break after 1990, both estimated models were run to provide forecasts for the out-of-sample period 1990-94. The null hypothesis of no structural change in any parameter between the sample and forecast period is strongly rejected (x² of 355.6). The RLS model underpredicted the inflation rate consistently over the forecasting period, although curiously enough, from 1991 onwards the actual inflation rate lies within conventional forecast errors (Chart 5.4).

Table 5.4.

Inflation Equations, 1982-89 Dependent variable: D4LPX

3. Estimating the “speed limit”

Given the estimations presented above, it is possible to calculate the “speed limit” effect according to equation (2). The “speed limit” defined in terms of the change in the output gap is conditioned on a given amount of slack and, thus, will vary along the business cycle. Table 5.5 presents the slope of the trade-off between the output gap change and the output gap level, calculated as in equation (2) as the ratio of the coefficient on the output gap level to the coefficient on the output gap change.

Table 5.5.

Estimated “Speed Limit” Trade-offs

Although these calculations refer to point estimates, it is interesting to note that there is some variation in the implied trade-offs. The flattest estimate corresponds to the RLS estimation for 1989-94 (a slope of -0.75) while the highest estimate was obtained for the RIV for the same sample period (a slope of -0.91). Allowing for the standard errors of the two coefficients involved in the calculation of this trade-off would obviously yield a less precise estimate of the “speed limit”. In this regard, it is important to notice that the coefficient on the lagged output gap exhibited a larger standard error than the coefficient on the output gap change. Moreover, as seen in Chart 5.2, the coefficient on the lagged output gap in the RLS estimation became statistically undistinguishable from zero during 1990-93, which in turn would also reduce the “speed limit” trade-off for this period. This is, of course, corroborated by the fact that the calculated trade-off for the RLS estimation on the 1982-94 period is smaller than the trade-off for 1982-89.

Subject to this and other caveats, the estimated “speed limit” trade-off corresponding to the RLS estimation for the 1982-94 period-- together with other iso-inflation lines--is graphed in Chart 5.5, where the yearly change in the output gap is plotted against the level of the output gap lagged one year. Along the negatively sloped line labeled “Inflation - 0” the inflationary impact of the output gap level is exactly offset by a matching change in the gap.

The evolution of the United Kingdom during 1994-95 is also shown in the chart. ^1/ The economy was growing so briskly during the first half of 1994 that, despite the sizeable output gap, the inflationary impact arising from changes in the output gap in all likelihood were close to surpassing the deflationary impact from the output gap level, thus being in the neighborhood of the “speed limit” in the second quarter. Since then the pace of expansion has moderated, with the economy experimenting a pause in the absorption of slack in mid-1995.

STATISTICAL APPENDIX

Table A1.

United Kingdom: Real Output and Its Major Components at Constant Factor Cost

(Percentage change over preceding year)

Source: Central Statistical Office, Economic Trends.

^{^1/}Includes oil and gas extraction.

^{^2/}Based on output data.

Table A1.

United Kingdom: Real Output and Its Major Components at Constant Factor Cost

(Percentage change over preceding year)

		1990 Weights	1989	1990	1991	1992	1993	1994
Agriculture, forestry, and fishing		19	5.0	3.4	1.9	4.9	-5.7	2.4
Total production and construction		350	2.9	0.3	-4.6	-0.9	1.3	4.8
	Manufacturing	232	4.5	-0.2	-5.4	-0.7	1.2	4.2
	Mining and quarrying ^1/	24	-15.5	-4.2	2.1	4.3	8.2	14.8
	Utilities	22	-0.4	2.8	5.6	-0.1	5.9	1.4
	Construction	72	5.9	2.4	-8.0	-4.0	-1.2	3.8
Transportation and communications		84	5.2	0.9	-1.9	1.8	4.1	7.4
Distributive trades		143	4.0	-0.7	-3.8	-0.2	2.0	3.9
Other services		404	0.8	1.2	0.3	-0.4	2.0	2.5
GDP ^2/		1,000	2.3	0.6	-2.1	-0.5	2.2	3.9
Memorandum items:
	Extraction of oil and gas	17	-18.6	-2.6	2.3	8.5	17.5	23.8
	Non-oil GDP	983	2.7	0.6	-2.2	-0.7	1.9	3.5
	Consumer goods		2.3	0.0	-4.8	1.1	1.4	4.1
	Intermediate goods		-1.1	-1.2	-2.3	0.1	3.4	6.4
	Investment goods		9.6	1.4	-6.0	-2.6	1.2	4.2

Source: Central Statistical Office, Economic Trends.

^{^1/}Includes oil and gas extraction.

^{^2/}Based on output data.

Table A1.

United Kingdom: Real Output and Its Major Components at Constant Factor Cost

(Percentage change over preceding year)

		1990 Weights	1989	1990	1991	1992	1993	1994
Agriculture, forestry, and fishing		19	5.0	3.4	1.9	4.9	-5.7	2.4
Total production and construction		350	2.9	0.3	-4.6	-0.9	1.3	4.8
	Manufacturing	232	4.5	-0.2	-5.4	-0.7	1.2	4.2
	Mining and quarrying ^1/	24	-15.5	-4.2	2.1	4.3	8.2	14.8
	Utilities	22	-0.4	2.8	5.6	-0.1	5.9	1.4
	Construction	72	5.9	2.4	-8.0	-4.0	-1.2	3.8
Transportation and communications		84	5.2	0.9	-1.9	1.8	4.1	7.4
Distributive trades		143	4.0	-0.7	-3.8	-0.2	2.0	3.9
Other services		404	0.8	1.2	0.3	-0.4	2.0	2.5
GDP ^2/		1,000	2.3	0.6	-2.1	-0.5	2.2	3.9
Memorandum items:
	Extraction of oil and gas	17	-18.6	-2.6	2.3	8.5	17.5	23.8
	Non-oil GDP	983	2.7	0.6	-2.2	-0.7	1.9	3.5
	Consumer goods		2.3	0.0	-4.8	1.1	1.4	4.1
	Intermediate goods		-1.1	-1.2	-2.3	0.1	3.4	6.4
	Investment goods		9.6	1.4	-6.0	-2.6	1.2	4.2

Source: Central Statistical Office, Economic Trends.

^{^1/}Includes oil and gas extraction.

^{^2/}Based on output data.

Table A2.

United Kingdom: Labor Market Indicators

Source: Department of Employment, Employment Gazette.

^{^1/}Not adjusted for seasonal variation.

^{^2/}Estimates of the self-employed, with or without employees, are based on labor force surveys for data through 1990, and on Department of Employment estimates thereafter.

^{^3/}Great Britain, percent of total.

^{^4/}Claimants basis.

^{^5/}Over 52 weeks.

Table A2.

United Kingdom: Labor Market Indicators

Level at March			1990	1991	1992	1993	1994	1995
Work force			28,719	28,666	28,524	28,285	28,131	27,975
	(Percent change)		(0.0)	(-0.2)	(-0.5)	(-0.8)	(-0.5)	(-0.6)
Work force in employment=
	(1 + 2 + 3 + 4)		27,138	26,606	25,934	25,355	25,473	25,715
	(Percent change)		(1.1)	(-2.0)	(-2.5)	(-2.2)	(0.5)	(1.0)
	1. Employees in employment		22,862	22,466	22,019	21,559	21,624	21,832
		Male	12,067	11,697	11,301	10,970	10,925	11,022
		Female	10,795	10,769	10,718	10,589	10,699	10,810
	2. Self-employed ^1/^2/		3,532	3,431	3,254	3,141	3,246	3,341
	3. H.M. forces ^1/		306	298	293	275	254	233
	4. Work related government training programs ^1/		436	406	363	354	323	286
Unemployment			1,591	2,060	2,590	2,930	2,658	2602
Employees in employment ^3/			100.0	100.0	100.0	100.0	100.0	100.0
	Manufactures		22.7	21.9	20.8	20.3	20.2	20.3
	Services		69.4	70.6	71.8	72.5	73.0	73.3
	Other		8.0	7.5	7.3	7.1	6.8	6.5
			(In percent)
Memorandum items:
	Unemployment rate ^4/		5.6	7.0	9.2	10.4	9.8	8.5
	Long-term unemployed ^5/		2.0	1.8	2.6	3.6	3.8	3.3
	Unemployment rate in the South East		3.6	5.6	8.6	10.3	9.6	8.2

Source: Department of Employment, Employment Gazette.

^{^1/}Not adjusted for seasonal variation.

^{^2/}Estimates of the self-employed, with or without employees, are based on labor force surveys for data through 1990, and on Department of Employment estimates thereafter.

^{^3/}Great Britain, percent of total.

^{^4/}Claimants basis.

^{^5/}Over 52 weeks.

Table A2.

United Kingdom: Labor Market Indicators

Level at March			1990	1991	1992	1993	1994	1995
Work force			28,719	28,666	28,524	28,285	28,131	27,975
	(Percent change)		(0.0)	(-0.2)	(-0.5)	(-0.8)	(-0.5)	(-0.6)
Work force in employment=
	(1 + 2 + 3 + 4)		27,138	26,606	25,934	25,355	25,473	25,715
	(Percent change)		(1.1)	(-2.0)	(-2.5)	(-2.2)	(0.5)	(1.0)
	1. Employees in employment		22,862	22,466	22,019	21,559	21,624	21,832
		Male	12,067	11,697	11,301	10,970	10,925	11,022
		Female	10,795	10,769	10,718	10,589	10,699	10,810
	2. Self-employed ^1/^2/		3,532	3,431	3,254	3,141	3,246	3,341
	3. H.M. forces ^1/		306	298	293	275	254	233
	4. Work related government training programs ^1/		436	406	363	354	323	286
Unemployment			1,591	2,060	2,590	2,930	2,658	2602
Employees in employment ^3/			100.0	100.0	100.0	100.0	100.0	100.0
	Manufactures		22.7	21.9	20.8	20.3	20.2	20.3
	Services		69.4	70.6	71.8	72.5	73.0	73.3
	Other		8.0	7.5	7.3	7.1	6.8	6.5
			(In percent)
Memorandum items:
	Unemployment rate ^4/		5.6	7.0	9.2	10.4	9.8	8.5
	Long-term unemployed ^5/		2.0	1.8	2.6	3.6	3.8	3.3
	Unemployment rate in the South East		3.6	5.6	8.6	10.3	9.6	8.2

Source: Department of Employment, Employment Gazette.

^{^1/}Not adjusted for seasonal variation.

^{^2/}Estimates of the self-employed, with or without employees, are based on labor force surveys for data through 1990, and on Department of Employment estimates thereafter.

^{^3/}Great Britain, percent of total.

^{^4/}Claimants basis.

^{^5/}Over 52 weeks.

Table A3.

United Kingdom: Selected National Accounts Aggregates at 1990 Market Prices

Sources: Central Statistical Office, Economic Trends.

^{^1/}Half yearly and quarterly levels at seasonally adjusted annual rates or changes from a year ago.

^{^2/}An unweighted average of expenditure, income, and output estimates.

^{^3/}Contribution to growth of GDP (average estimate).

^{^4/}Average measure in billions of pounds.

Table A3.

United Kingdom: Selected National Accounts Aggregates at 1990 Market Prices

			1990	1991	1992	1993	1994		1994^1/		1995^1/
									1st half	2nd half	1st qtr.	2nd qtr.
			(In billions of pounds starling)
Private consumption				347.5	339.9	339.9	348.4	358.9	356.2	361.6	362.8	365.7
Government consumption				112.9	115.8	115.8	116.0	118.4	118.3	118.4	118.6	119.1
Gross domestic fixed capital formation				107.6	97.4	96.3	96.5	100.1	100.5	99.6	100.2	101.7
	Residential			21.4	17.9	18.3	19.4	20.2	20.6	19.7	20.6	20.3
	Non-residential construction			39.1	37.5	37.2	36.2	36.7	37.3	36.0	36.0	35.8
	Plant and equipment			47.0	42.0	40.8	40.9	43.3	42.6	43.9	43.6	45.7
Stockbuilding and work in progress				-1.8	-4.6	-1.7	0.3	2.8	1.5	4.0	3.2	5.0
		Total domestic demand		566.2	548.5	550.4	561.3	580.1	576.6	583.6	584.7	591.5
Exports of goods and services				133.2	132.2	136.3	142.0	153.7	149.9	157.5	159.5	158.4
Imports of goods and services				148.3	140.4	149.1	153.8	163.2	161.2	165.1	163.1	165.5
	Foreign Balance			-15.1	-8.2	-12.8	-11.8	-9.5	-11.3	-7.6	-3.5	-7.1
Gross domestic product:
	Expenditure estimate			551.1	540.3	537.6	549.6	570.6	565.3	576.0	581.1	584.4
Statistical adjustment				--	--	--	--	0.1	0.1	0.1	0.1	0.1
	Average estimate ^2/			551.1	540.3	537.6	549.6	570.7	565.4	576.1	581.3	584.5
			(Annual percentage change)
Private consumption				0.6	-2.2	0.0	2.5	3.0	3.2	2.8	2.1	2.4
Government consumption				2.5	2.6	-0.0	0.2	2.0	2.5	1.5	0.4	0.4
Gross domestic fixed capital formation				-3.5	-9.5	-1.2	0.3	3.7	4.4	3.0	-1.7	2.6
	Residential			-13.5	-16.4	2.0	6.1	3.9	7.7	0.2	-1.5	0.2
	Non-residential construction			4.2	-4.1	-1.0	-2.4	1.1	3.0	-0.7	-6.6	-1.0
	Plant and equipment			-4.3	-10.8	-2.7	0.1	5.8	4.1	7.5	2.5	6.9
Stockbuilding and work in progress ^3/				-0.8	-0.5	0.5	0.4	0.4	0.3	0.6	0.4	0.5
		Total domestic demand		-0.6	-3.1	0.3	2.0	3.3	3.5	3.1	1.5	2.5
Exports of goods and services				5.0	-0.7	3.1	4.2	8.2	7.0	9.4	8.0	4.2
Imports of goods and services				0.5	-5.3	6.2	3.1	6.1	6.2	6.0	0.5	3.4
	Foreign balance ^3/			1.0	1.3	-0.9	0.2	0.4	0.1	0.7	2.0	0.2
Gross domestic product:
	Expenditure estimate			0.4	-2.0	-0.5	2.2	3.8	3.7	4.0	3.5	2.7
	Average estimate ^2/			0.4	-2.0	-0.5	2.2	3.8	3.7	4.0	3.5	2.7
Memorandum items:
	GDP at factor cost based on:
		Expenditure data		0.6	-2.1	-0.5	2.2	3.9	3.8	4.0	3.7	2.8
		Income data		0.6	-2.1	-0.5	2.2	4.0	3.8	4.2	3.7	2.8
		Output data		0.6	-2.1	-0.5	2.2	3.9	3.8	4.1	3.7	2.8
	Non-oil GDP			0.6	-2.2	-0.7	1.9	3.5	3.2	3.8	3.5	2.8
	GDP at current market prices ^4/			551	575	597	631	669	660	678	689	695
		(Percent change)		(6.8)	(4.4)	(3.8)	(5.6)	(6.1)	(6.4)	(5.7)	(5.1)	(4.5)

Sources: Central Statistical Office, Economic Trends.

^{^1/}Half yearly and quarterly levels at seasonally adjusted annual rates or changes from a year ago.

^{^2/}An unweighted average of expenditure, income, and output estimates.

^{^3/}Contribution to growth of GDP (average estimate).

^{^4/}Average measure in billions of pounds.

Table A3.

United Kingdom: Selected National Accounts Aggregates at 1990 Market Prices

			1990	1991	1992	1993	1994		1994^1/		1995^1/
									1st half	2nd half	1st qtr.	2nd qtr.
			(In billions of pounds starling)
Private consumption				347.5	339.9	339.9	348.4	358.9	356.2	361.6	362.8	365.7
Government consumption				112.9	115.8	115.8	116.0	118.4	118.3	118.4	118.6	119.1
Gross domestic fixed capital formation				107.6	97.4	96.3	96.5	100.1	100.5	99.6	100.2	101.7
	Residential			21.4	17.9	18.3	19.4	20.2	20.6	19.7	20.6	20.3
	Non-residential construction			39.1	37.5	37.2	36.2	36.7	37.3	36.0	36.0	35.8
	Plant and equipment			47.0	42.0	40.8	40.9	43.3	42.6	43.9	43.6	45.7
Stockbuilding and work in progress				-1.8	-4.6	-1.7	0.3	2.8	1.5	4.0	3.2	5.0
		Total domestic demand		566.2	548.5	550.4	561.3	580.1	576.6	583.6	584.7	591.5
Exports of goods and services				133.2	132.2	136.3	142.0	153.7	149.9	157.5	159.5	158.4
Imports of goods and services				148.3	140.4	149.1	153.8	163.2	161.2	165.1	163.1	165.5
	Foreign Balance			-15.1	-8.2	-12.8	-11.8	-9.5	-11.3	-7.6	-3.5	-7.1
Gross domestic product:
	Expenditure estimate			551.1	540.3	537.6	549.6	570.6	565.3	576.0	581.1	584.4
Statistical adjustment				--	--	--	--	0.1	0.1	0.1	0.1	0.1
	Average estimate ^2/			551.1	540.3	537.6	549.6	570.7	565.4	576.1	581.3	584.5
			(Annual percentage change)
Private consumption				0.6	-2.2	0.0	2.5	3.0	3.2	2.8	2.1	2.4
Government consumption				2.5	2.6	-0.0	0.2	2.0	2.5	1.5	0.4	0.4
Gross domestic fixed capital formation				-3.5	-9.5	-1.2	0.3	3.7	4.4	3.0	-1.7	2.6
	Residential			-13.5	-16.4	2.0	6.1	3.9	7.7	0.2	-1.5	0.2
	Non-residential construction			4.2	-4.1	-1.0	-2.4	1.1	3.0	-0.7	-6.6	-1.0
	Plant and equipment			-4.3	-10.8	-2.7	0.1	5.8	4.1	7.5	2.5	6.9
Stockbuilding and work in progress ^3/				-0.8	-0.5	0.5	0.4	0.4	0.3	0.6	0.4	0.5
		Total domestic demand		-0.6	-3.1	0.3	2.0	3.3	3.5	3.1	1.5	2.5
Exports of goods and services				5.0	-0.7	3.1	4.2	8.2	7.0	9.4	8.0	4.2
Imports of goods and services				0.5	-5.3	6.2	3.1	6.1	6.2	6.0	0.5	3.4
	Foreign balance ^3/			1.0	1.3	-0.9	0.2	0.4	0.1	0.7	2.0	0.2
Gross domestic product:
	Expenditure estimate			0.4	-2.0	-0.5	2.2	3.8	3.7	4.0	3.5	2.7
	Average estimate ^2/			0.4	-2.0	-0.5	2.2	3.8	3.7	4.0	3.5	2.7
Memorandum items:
	GDP at factor cost based on:
		Expenditure data		0.6	-2.1	-0.5	2.2	3.9	3.8	4.0	3.7	2.8
		Income data		0.6	-2.1	-0.5	2.2	4.0	3.8	4.2	3.7	2.8
		Output data		0.6	-2.1	-0.5	2.2	3.9	3.8	4.1	3.7	2.8
	Non-oil GDP			0.6	-2.2	-0.7	1.9	3.5	3.2	3.8	3.5	2.8
	GDP at current market prices ^4/			551	575	597	631	669	660	678	689	695
		(Percent change)		(6.8)	(4.4)	(3.8)	(5.6)	(6.1)	(6.4)	(5.7)	(5.1)	(4.5)

Sources: Central Statistical Office, Economic Trends.

^{^1/}Half yearly and quarterly levels at seasonally adjusted annual rates or changes from a year ago.

^{^2/}An unweighted average of expenditure, income, and output estimates.

^{^3/}Contribution to growth of GDP (average estimate).

^{^4/}Average measure in billions of pounds.

Table A4.

United Kingdom: Selected Personal Sector Data

(In percent of GDP)

Sources: CSO, Financial Statistics. Economic Trends: and staff estimates.

^{^1/}New dwellings, mortgage approved. Data for December of each year.

Table A4.

United Kingdom: Selected Personal Sector Data

(In percent of GDP)

			1982	1983	1984	1985	1986	1987	1988	1989	1990	1991	1992	1993	1994
Disposable income			68.4	67.5	68.6	68.1	68.7	67.4	67.4	68.4	68.8	70.9	73.4	72.5	70.7
Consumption.			60.7	61.0	61.0	60.9	62.8	62.7	63.5	63.4	63.1	63.4	64.0	64.3	64.0
Saving			7.7	6.5	7.6	7.3	6.0	4.8	3.9	5.0	5.8	7.4	9.4	8.2	6.7
	(savings ratio)		(11.3)	(9.7)	(11.1)	(10.7)	(8.7)	(7.1)	(5.7)	(7.2)	(8.4)	(10.5)	(12.8)	(11.4)	(9.4)
Net capital transfers			0.1	0.3	0.4	0.1	-0.0	-0.1	-0.3	-0.1	0.0	0.3	0.3	0.5	0.3
Investment			4.5	4.8	4.8	4.6	5.0	5.6	6.7	6.0	5.3	4.4	4.0	4.2	4.2
	of which: Dwellings		(2.4)	(2.5)	(2.8)	(2.7)	(3.0)	(3.1)	(3.8)	(3.7)	(3.1)	(2.7)	(2.7)	(2.6)	(2.7)
Financial balance			3.4	2.1	3.2	2.8	0.9	-0.9	-3.1	-1.2	0.5	3.3	5.7	4.6	2.8
Financial assets			147.8	159.2	174.6	180.5	201.3	202.7	205.9	225.4	207.1	222.3	238.1	265.5	247.6
Financial liabilities			46.0	50.0	54.0	57.3	62.2	66.7	72.3	76.3	81.1	83.2	82.4	79.3	78.4
	Net financial assets		101.8	109.2	120.6	123.2	139.1	136.0	133.7	149.0	125.9	139.2	155.6	186.2	169.2
Tangible assets			160.6	171.6	177.9	182.3	195.0	213.8	256.8	253.9	234.2	222.8	203.7	197.4	183.8
	of which:
		Residential buildings	(130.7)	(141.4)	(149.6)	(156.1)	(169.5)	(188.1)	(230.1)	(227.2)	(210.2)	(201.2)	(182.7)	(176.9)	(163.6)
Net wealth			296.5	313.6	329.2	335.8	364.6	382.4	426.0	437.6	393.9	394.7	390.8	413.5	381.4
Memorandum items:
	Household savings ratio		2.1	0.4	1.9	1.7	-0.2	-1.8	-2.7	-2.6	-0.4	1.6	4.6	4.0	2.5
	House prices ^1/		29,604	32,090	35,220	40,190	46,366	56,743	70,883	78,387	80,642	75,294	71,150	74,507	77,077
	Equity withdrawal/disposable
		income	2.6	1.8	2.3	2.7	4.5	3.8	4.7	2.7	2.8	1.3	-0.3	-0.9	-0.5

Sources: CSO, Financial Statistics. Economic Trends: and staff estimates.

^{^1/}New dwellings, mortgage approved. Data for December of each year.

Table A4.

United Kingdom: Selected Personal Sector Data

(In percent of GDP)

			1982	1983	1984	1985	1986	1987	1988	1989	1990	1991	1992	1993	1994
Disposable income			68.4	67.5	68.6	68.1	68.7	67.4	67.4	68.4	68.8	70.9	73.4	72.5	70.7
Consumption.			60.7	61.0	61.0	60.9	62.8	62.7	63.5	63.4	63.1	63.4	64.0	64.3	64.0
Saving			7.7	6.5	7.6	7.3	6.0	4.8	3.9	5.0	5.8	7.4	9.4	8.2	6.7
	(savings ratio)		(11.3)	(9.7)	(11.1)	(10.7)	(8.7)	(7.1)	(5.7)	(7.2)	(8.4)	(10.5)	(12.8)	(11.4)	(9.4)
Net capital transfers			0.1	0.3	0.4	0.1	-0.0	-0.1	-0.3	-0.1	0.0	0.3	0.3	0.5	0.3
Investment			4.5	4.8	4.8	4.6	5.0	5.6	6.7	6.0	5.3	4.4	4.0	4.2	4.2
	of which: Dwellings		(2.4)	(2.5)	(2.8)	(2.7)	(3.0)	(3.1)	(3.8)	(3.7)	(3.1)	(2.7)	(2.7)	(2.6)	(2.7)
Financial balance			3.4	2.1	3.2	2.8	0.9	-0.9	-3.1	-1.2	0.5	3.3	5.7	4.6	2.8
Financial assets			147.8	159.2	174.6	180.5	201.3	202.7	205.9	225.4	207.1	222.3	238.1	265.5	247.6
Financial liabilities			46.0	50.0	54.0	57.3	62.2	66.7	72.3	76.3	81.1	83.2	82.4	79.3	78.4
	Net financial assets		101.8	109.2	120.6	123.2	139.1	136.0	133.7	149.0	125.9	139.2	155.6	186.2	169.2
Tangible assets			160.6	171.6	177.9	182.3	195.0	213.8	256.8	253.9	234.2	222.8	203.7	197.4	183.8
	of which:
		Residential buildings	(130.7)	(141.4)	(149.6)	(156.1)	(169.5)	(188.1)	(230.1)	(227.2)	(210.2)	(201.2)	(182.7)	(176.9)	(163.6)
Net wealth			296.5	313.6	329.2	335.8	364.6	382.4	426.0	437.6	393.9	394.7	390.8	413.5	381.4
Memorandum items:
	Household savings ratio		2.1	0.4	1.9	1.7	-0.2	-1.8	-2.7	-2.6	-0.4	1.6	4.6	4.0	2.5
	House prices ^1/		29,604	32,090	35,220	40,190	46,366	56,743	70,883	78,387	80,642	75,294	71,150	74,507	77,077
	Equity withdrawal/disposable
		income	2.6	1.8	2.3	2.7	4.5	3.8	4.7	2.7	2.8	1.3	-0.3	-0.9	-0.5

Sources: CSO, Financial Statistics. Economic Trends: and staff estimates.

^{^1/}New dwellings, mortgage approved. Data for December of each year.

Table A5.

United Kingdom: Components of Personal Income

Source: Central Statistical Office, United Kingdom National Accounts.

^{^1/}Half yearly and quarterly levels at seasonally adjusted annual rates or changes from a year ago.

^{^2/}In 1990 prices, deflated by the implied deflator for consumers’ expenditure.

^{^3/}Relative to personal disposable income.

^{^4/}Contribution to growth in disposable income.

Table A5.

United Kingdom: Components of Personal Income

		1990	1991	1992	1993	1994	1994^1/		1995^1/
							1st half	2nd half	1st qtr.	2nd qtr.
				(In billions of pounds sterling)
Total personal income		486.7	518.4	551.5	570.9	594.4	585.9	602.8	617.1	620.8
	Wages, salaries, and armed forces pay	275.0	289.4	300.9	308.3	318.4	315.8	321.0	327.7	326.8
	Employers’ contributions	37.3	40.2	41.3	43.7	44.3	44.3	44.4	44.6	44.8
	National Insurance benefits and other current grants from Government	58.9	69.3	80.1	88.4	92.4	91.8	93.1	95.1	97.1
	Other personal income	115.4	119.5	129.2	130.5	139.2	134.1	144.3	149.8	152.1
U.K. taxes on income		61.5	63.4	65.2	63.8	68.3	66.1	70.6	72.4	73.6
National Insurance contributions		34.7	36.4	37.2	38.8	42.0	40.8	43.2	42.6	42.7
Community charge		8.6	8.1	7.9	8.0	8.5	8.3	8.6	8.6	9.2
Other miscellaneous deductions		2.6	2.7	2.7	2.9	3.0	2.9	3.2	2.9	3.0
Total personal disposable income		379.3	407.8	438.5	457.5	472.6	467.9	477.3	490.5	492.3
Real personal disposable income ^2/		379.3	379.8	390.0	393.1	396.2	394.7	397.7	403.9	403.2
Consumer expenditure		347.5	365.0	382.2	405.5	428.1	422.3	433.9	440.5	446.5
Real consumer expenditure		347.5	339.9	339.9	348.4	358.9	356.2	361.6	362.8	365.7
	Durable goods	34.7	30.8	30.6	33.8	37.7	37.1	38.4	38.7	39.3
	Non-durable goods	154.3	153.1	153.7	155.9	159.0	158.2	159.8	160.2	159.9
	Services	158.6	156.0	155.7	158.8	162.1	160.9	163.4	163.9	166.5
Personal savings ratio ^3/		8.4	10.5	12.8	11.4	9.4	9.8	9.1	10.2	9.3
Personal financial balance ^3/		0.8	4.7	7.8	6.3	3.9	4.2	3.6	4.9	3.5
				(Annual percentage change)
Total personal income		10.0	6.5	6.4	3.5	4.1	3.4	4.8	5.6	5.6
	Wages, salaries and armed forces pay	10.4	5.2	4.0	2.5	3.3	3.3	3.3	3.8	3.5
	Employers’ contributions	8.7	7.7	2.8	5.7	1.5	2.5	0.6	-0.0	1.7
	National Insurance benefits etc.	9.1	17.6	15.6	10.4	4.5	5.9	3.2	2.9	6.6
	Other personal income	10.0	3.5	8.2	1.0	6.6	2.4	10.8	13.9	11.3
U.K. taxes on income		14.8	3.0	2.8	-2.1	7.1	3.4	10.7	10.9	9.8
National Insurance contributions		5.3	5.0	2.3	4.1	8.3	6.6	10.0	4.8	4.5
Community charge ^4/		-2.3	0.1	0.1	-0.0	-0.1	-0.0	-0.1	-0.1	-0.1
Total personal disposable income		7.5	7.5	7.5	4.3	3.3	3.2	3.4	5.0	5.1
Real personal disposable income		1.9	0.1	2.7	0.8	0.8	0.5	1.0	2.2	2.3
Consumar expenditure		6.2	5.0	4.7	6.1	5.6	6.0	5.2	4.9	5.2
Real consumar expenditure		0.6	-2.2	0.0	2.5	3.0	3.2	2.8	2.1	2.4
	Durable goods	-5.9	-11.1	-0.8	10.4	11.7	14.0	9.5	5.4	4.9
	Non-durable goods	0.4	-0.8	0.4	1.4	2.0	2.2	1.8	1.5	0.7
	Services	2.4	-1.6	-0.2	2.0	2.1	1.9	2.3	1.9	3.4
Memorandum item:
	Implied consumption deflator	5.5	7.4	4.7	3.5	2.5	2.7	2.3	2.7	2.7

Source: Central Statistical Office, United Kingdom National Accounts.

^{^1/}Half yearly and quarterly levels at seasonally adjusted annual rates or changes from a year ago.

^{^2/}In 1990 prices, deflated by the implied deflator for consumers’ expenditure.

^{^3/}Relative to personal disposable income.

^{^4/}Contribution to growth in disposable income.

Table A5.

United Kingdom: Components of Personal Income

		1990	1991	1992	1993	1994	1994^1/		1995^1/
							1st half	2nd half	1st qtr.	2nd qtr.
				(In billions of pounds sterling)
Total personal income		486.7	518.4	551.5	570.9	594.4	585.9	602.8	617.1	620.8
	Wages, salaries, and armed forces pay	275.0	289.4	300.9	308.3	318.4	315.8	321.0	327.7	326.8
	Employers’ contributions	37.3	40.2	41.3	43.7	44.3	44.3	44.4	44.6	44.8
	National Insurance benefits and other current grants from Government	58.9	69.3	80.1	88.4	92.4	91.8	93.1	95.1	97.1
	Other personal income	115.4	119.5	129.2	130.5	139.2	134.1	144.3	149.8	152.1
U.K. taxes on income		61.5	63.4	65.2	63.8	68.3	66.1	70.6	72.4	73.6
National Insurance contributions		34.7	36.4	37.2	38.8	42.0	40.8	43.2	42.6	42.7
Community charge		8.6	8.1	7.9	8.0	8.5	8.3	8.6	8.6	9.2
Other miscellaneous deductions		2.6	2.7	2.7	2.9	3.0	2.9	3.2	2.9	3.0
Total personal disposable income		379.3	407.8	438.5	457.5	472.6	467.9	477.3	490.5	492.3
Real personal disposable income ^2/		379.3	379.8	390.0	393.1	396.2	394.7	397.7	403.9	403.2
Consumer expenditure		347.5	365.0	382.2	405.5	428.1	422.3	433.9	440.5	446.5
Real consumer expenditure		347.5	339.9	339.9	348.4	358.9	356.2	361.6	362.8	365.7
	Durable goods	34.7	30.8	30.6	33.8	37.7	37.1	38.4	38.7	39.3
	Non-durable goods	154.3	153.1	153.7	155.9	159.0	158.2	159.8	160.2	159.9
	Services	158.6	156.0	155.7	158.8	162.1	160.9	163.4	163.9	166.5
Personal savings ratio ^3/		8.4	10.5	12.8	11.4	9.4	9.8	9.1	10.2	9.3
Personal financial balance ^3/		0.8	4.7	7.8	6.3	3.9	4.2	3.6	4.9	3.5
				(Annual percentage change)
Total personal income		10.0	6.5	6.4	3.5	4.1	3.4	4.8	5.6	5.6
	Wages, salaries and armed forces pay	10.4	5.2	4.0	2.5	3.3	3.3	3.3	3.8	3.5
	Employers’ contributions	8.7	7.7	2.8	5.7	1.5	2.5	0.6	-0.0	1.7
	National Insurance benefits etc.	9.1	17.6	15.6	10.4	4.5	5.9	3.2	2.9	6.6
	Other personal income	10.0	3.5	8.2	1.0	6.6	2.4	10.8	13.9	11.3
U.K. taxes on income		14.8	3.0	2.8	-2.1	7.1	3.4	10.7	10.9	9.8
National Insurance contributions		5.3	5.0	2.3	4.1	8.3	6.6	10.0	4.8	4.5
Community charge ^4/		-2.3	0.1	0.1	-0.0	-0.1	-0.0	-0.1	-0.1	-0.1
Total personal disposable income		7.5	7.5	7.5	4.3	3.3	3.2	3.4	5.0	5.1
Real personal disposable income		1.9	0.1	2.7	0.8	0.8	0.5	1.0	2.2	2.3
Consumar expenditure		6.2	5.0	4.7	6.1	5.6	6.0	5.2	4.9	5.2
Real consumar expenditure		0.6	-2.2	0.0	2.5	3.0	3.2	2.8	2.1	2.4
	Durable goods	-5.9	-11.1	-0.8	10.4	11.7	14.0	9.5	5.4	4.9
	Non-durable goods	0.4	-0.8	0.4	1.4	2.0	2.2	1.8	1.5	0.7
	Services	2.4	-1.6	-0.2	2.0	2.1	1.9	2.3	1.9	3.4
Memorandum item:
	Implied consumption deflator	5.5	7.4	4.7	3.5	2.5	2.7	2.3	2.7	2.7

Source: Central Statistical Office, United Kingdom National Accounts.

^{^1/}Half yearly and quarterly levels at seasonally adjusted annual rates or changes from a year ago.

^{^2/}In 1990 prices, deflated by the implied deflator for consumers’ expenditure.

^{^3/}Relative to personal disposable income.

^{^4/}Contribution to growth in disposable income.

Table A6.

United Kingdom: Selected Financial Statistics Industrial and Commercial Companies

(In percent of GDP)

Source: CSO, Financial Statistics.

^{^1/}First two quarters at an annual rate.

^{^2/}Net of stock appreciation.

^{^3/}Bank borrowing and other loans less bank deposits.

^{^4/}Large companies.

^{^5/}Ratio of interest payments to post-tax income.

Table A6.

United Kingdom: Selected Financial Statistics Industrial and Commercial Companies

(In percent of GDP)

			1982	1983	1984	1985	1986	1987	1988	1989	1990	1991	1992	1993	1994	1995 ^1/
Income			17.6	18.7	20.5	21.0	18.4	20.2	20.7	21.5	20.6	18.3	17.4	18.4	20.2	20.6
	of which: gross trading profits ^2/		(12.6)	(13.7)	(14.9)	C16.1)	(14.0)	(14.6)	(14.7)	(14.3)	(13.5)	(12.8)	(12.4)	(13.5)	(14.7)	(14.6)
Less: taxes. Interests, and dividends			9.8	10.0	10.7	11.3	9.5	10.1	11.0	13.5	13.8	12.0	11.0	9.8	10.0	10.8
Undistributed Income (=saving)			7.8	8.8	9.7	9.7	8.9	10.1	9.7	7.9	6.8	6.3	6.3	8.6	10.2	9.8
Less: Investment			6.7	7.1	8.4	8.7	8.4	10.0	11.3	12.0	10.7	8.2	8.0	8.0	8.0	8.4
Financial balance			1.1	1.7	1.3	1.0	0.5	0.1	-1.5	-4.1	-3.9	-1.9	-1.7	0.6	2.2	1.5
	Financed by:
		Net borrowing ^3/	2.3	-0.7	2.2	1.5	-0.2	2.0	6.9	6.5	4.3	0.3	0.5	-1.8	-0.9	1.9
		Other	-3.4	-1.0	-3.5	-2.6	-0.4	-2.1	-5.4	-2.5	-0.4	1.6	1.2	1.3	1.3	-3.3
Financial assets			60.3	63.5	70.9	67.2	71.5	68.6	70.0	72.3	68.4	69.5	72.2	76.4	75.1	74.7
Financial liabilities			104.8	112.3	124.4	128.3	148.6	153.1	158.5	182.5	169.5	183.9	196.2	221.3	206.4	206.4
Net financial assets			-44.5	-48.8	-53.5	-61.1	-77.1	-84.5	-88.5	-110.2	-101.0	-114.4	-123.9	-145.0	-131.3	-131.7
									(In percent)
Memorandum items:
	Liquidity ratio ^4/		81.2	108.8	107.5	95.2	97.8	121.8	108.0	100.8	104.8	114.2	116.2	119.0	140.5	…
	Income gearing ^5/		24.8	20.5	20.4	21.5	20.7	18.3	19.5	28.2	33.6	32.8	29.7	20.7	17.1	17.7

Source: CSO, Financial Statistics.

^{^1/}First two quarters at an annual rate.

^{^2/}Net of stock appreciation.

^{^3/}Bank borrowing and other loans less bank deposits.

^{^4/}Large companies.

^{^5/}Ratio of interest payments to post-tax income.

Table A6.

United Kingdom: Selected Financial Statistics Industrial and Commercial Companies

(In percent of GDP)

			1982	1983	1984	1985	1986	1987	1988	1989	1990	1991	1992	1993	1994	1995 ^1/
Income			17.6	18.7	20.5	21.0	18.4	20.2	20.7	21.5	20.6	18.3	17.4	18.4	20.2	20.6
	of which: gross trading profits ^2/		(12.6)	(13.7)	(14.9)	C16.1)	(14.0)	(14.6)	(14.7)	(14.3)	(13.5)	(12.8)	(12.4)	(13.5)	(14.7)	(14.6)
Less: taxes. Interests, and dividends			9.8	10.0	10.7	11.3	9.5	10.1	11.0	13.5	13.8	12.0	11.0	9.8	10.0	10.8
Undistributed Income (=saving)			7.8	8.8	9.7	9.7	8.9	10.1	9.7	7.9	6.8	6.3	6.3	8.6	10.2	9.8
Less: Investment			6.7	7.1	8.4	8.7	8.4	10.0	11.3	12.0	10.7	8.2	8.0	8.0	8.0	8.4
Financial balance			1.1	1.7	1.3	1.0	0.5	0.1	-1.5	-4.1	-3.9	-1.9	-1.7	0.6	2.2	1.5
	Financed by:
		Net borrowing ^3/	2.3	-0.7	2.2	1.5	-0.2	2.0	6.9	6.5	4.3	0.3	0.5	-1.8	-0.9	1.9
		Other	-3.4	-1.0	-3.5	-2.6	-0.4	-2.1	-5.4	-2.5	-0.4	1.6	1.2	1.3	1.3	-3.3
Financial assets			60.3	63.5	70.9	67.2	71.5	68.6	70.0	72.3	68.4	69.5	72.2	76.4	75.1	74.7
Financial liabilities			104.8	112.3	124.4	128.3	148.6	153.1	158.5	182.5	169.5	183.9	196.2	221.3	206.4	206.4
Net financial assets			-44.5	-48.8	-53.5	-61.1	-77.1	-84.5	-88.5	-110.2	-101.0	-114.4	-123.9	-145.0	-131.3	-131.7
									(In percent)
Memorandum items:
	Liquidity ratio ^4/		81.2	108.8	107.5	95.2	97.8	121.8	108.0	100.8	104.8	114.2	116.2	119.0	140.5	…
	Income gearing ^5/		24.8	20.5	20.4	21.5	20.7	18.3	19.5	28.2	33.6	32.8	29.7	20.7	17.1	17.7

Source: CSO, Financial Statistics.

^{^1/}First two quarters at an annual rate.

^{^2/}Net of stock appreciation.

^{^3/}Bank borrowing and other loans less bank deposits.

^{^4/}Large companies.

^{^5/}Ratio of interest payments to post-tax income.

Table A7.

United Kingdom: Selected Indicators of Investment Activity

Source: Central Statistical Office, United Kingdom National Accounts.

^{^1/}Half yearly and quarterly levels at seasonally adjusted annual rates or changes from a year ago.

DF and ADF: Constant, Trend and Seasonals included
(Critical values: 5%= -3.469 1%= -4.082)
	t-adf	σ	lag	t-lag	t-prob
LPX	-1.8835	0.0087568	3	-0.33945	0.7353
LPX	-1.8649	0.0086997	2	2.1212	0.0376
LPX	-2.1307	0.0089176	1	3.0882	0.0029
LPX	-2.6581	0.0094457	0
DLPX	-3.1527	0.0089768	3	-0.36317	0.7176
DLPX	-3.3886	0.0089193	2	-0.015397	0.9878
DLPX	-3.5624^*	0.0088545	1	-2.3645	0.0209
DLPX	-5.5803^**	0.0091403	0
DF and ADF: Constant and Trend included
(Critical values: 5%= -3.469 1%= -4.082)
	t-adf	σ	lag	t-lag	t-prob
LPM	-2.7841	0.024398	3	-1.4755	0.1446
LPM	-2.8389	0.024600	2	0.60106	0.5497
LPM	-2.8678	0.024491	1	0.83908	0.4042
LPM	-2.9523	0.024441	0
LULC1	-1.6860	0.010677	3	3.3236	0.0014
LULC1	-1.4127	0.011408	2	1.4469	0.1523
LULC1	-1.3149	0.011494	1	4.8737	0.0000
LULC1	-0.70927	0.013164	0
DLPM	-4.8886^**	0.025590	3	0.82450	0.4125
DLPM	-5.2772^**	0.025532	2	1.5464	0.1264
DLPM	-5.2230^**	0.025778	1	-0.64270	0.5225
DLPM	-7.6062^**	0.025674	0
DLULC1	-2.5142	0.010787	3	1.1698	0.2460
DLULC1	-2.3392	0.010815	2	-3.1963	0.0021
DLULC1	-3.7458^*	0.011486	1	-1.3520	0.1806
DLULC1	-5.1278^**	0.011551	0
DF and ADF:
(Critical values: 5%= -1.945 1%= -2.593)
	t-adf	σ	lag	t-lag	t-prob
YGAP	-2.1664^*	0.85637	3	2.1497	0.0349
YGAP	-1.6043	0.87735	2	1.2904	0.2010
YGAP	-1.3602	0.88128	1	-0.70197	0.4849
YGAP	-1.5423	0.87830	0

DF and ADF: Constant, Trend and Seasonals included
(Critical values: 5%= -3.469 1%= -4.082)
	t-adf	σ	lag	t-lag	t-prob
LPX	-1.8835	0.0087568	3	-0.33945	0.7353
LPX	-1.8649	0.0086997	2	2.1212	0.0376
LPX	-2.1307	0.0089176	1	3.0882	0.0029
LPX	-2.6581	0.0094457	0
DLPX	-3.1527	0.0089768	3	-0.36317	0.7176
DLPX	-3.3886	0.0089193	2	-0.015397	0.9878
DLPX	-3.5624^*	0.0088545	1	-2.3645	0.0209
DLPX	-5.5803^**	0.0091403	0
DF and ADF: Constant and Trend included
(Critical values: 5%= -3.469 1%= -4.082)
	t-adf	σ	lag	t-lag	t-prob
LPM	-2.7841	0.024398	3	-1.4755	0.1446
LPM	-2.8389	0.024600	2	0.60106	0.5497
LPM	-2.8678	0.024491	1	0.83908	0.4042
LPM	-2.9523	0.024441	0
LULC1	-1.6860	0.010677	3	3.3236	0.0014
LULC1	-1.4127	0.011408	2	1.4469	0.1523
LULC1	-1.3149	0.011494	1	4.8737	0.0000
LULC1	-0.70927	0.013164	0
DLPM	-4.8886^**	0.025590	3	0.82450	0.4125
DLPM	-5.2772^**	0.025532	2	1.5464	0.1264
DLPM	-5.2230^**	0.025778	1	-0.64270	0.5225
DLPM	-7.6062^**	0.025674	0
DLULC1	-2.5142	0.010787	3	1.1698	0.2460
DLULC1	-2.3392	0.010815	2	-3.1963	0.0021
DLULC1	-3.7458^*	0.011486	1	-1.3520	0.1806
DLULC1	-5.1278^**	0.011551	0
DF and ADF:
(Critical values: 5%= -1.945 1%= -2.593)
	t-adf	σ	lag	t-lag	t-prob
YGAP	-2.1664^*	0.85637	3	2.1497	0.0349
YGAP	-1.6043	0.87735	2	1.2904	0.2010
YGAP	-1.3602	0.88128	1	-0.70197	0.4849
YGAP	-1.5423	0.87830	0

eigenvalue μi	loglik for	rank
	1000.60	0
0.39847	1020.93	1
0.188677	1029.29	2
0.0618148	1031.85	3
-9.41233e-017	---
Ho:rank=p	-Tlog(1 - μ)	using T-nm	95%	-TΣlg(1- μ)	using T-nm	95%
p = 0	40.66^**	37.61^**	25.5	62.49^**	57.81^**	42.4
p <= 1	16.73	15.47	19.0	21.83	20.19	25.3
p <= 2	5.105	4.722	12.3	5.105	4.722	12.3
standardized β’ eigenvectors
LPX	LPM	LULC1	Trend
1.000	-0.2571	-0.6955	-0.001509
-1.501	1.000	0.6534	0.004645
-0.5015	-0.2140	1.000	-0.005447
standardized α coefficients
LPX	-0.4051	0.01234	-0.01561
LPM	-0.09079	-0.2763	0.01801
LULC1	0.05162	0.01011	-0.07275
long-run matrix Po=αβ, rank 1
	LPX	LPM	LULC1	Trend
LPX	-0.4051	0.1042	0.2817	0.0006114
LPM	-0.09079	0.02334	0.06314	0.0001370
LULC1	0.05162	-0.01327	-0.03590	-7.790e-005
General cointegration test. Restriction: β1 - β2 - β3 = 0
standardized β’ eigenvectors
LPX	LPM	LULC1	Trend
1.000	-0.2857	-0.7143	-0.0009893
standardized α coefficients
LPX	-0.4208
LPM	-0.004620
LULC1	0.07875
Restricted long-run matrix Po=αβ’, rank 1
	LPX	LPM	LULC1	Trend
LPX	-0.4208	0.1202	0.3006	0.0004163
LPM	-0.004620	0.001320	0.003300	4.570e-006
LULC1	0.07875	-0.02250	-0.05625	-7.791e-005
loglik = 1019.63 unrloglik = 1020.93
LR-test, rank=1: Chi²(≈0) = 2.5959 [1.0000]

eigenvalue μi	loglik for	rank
	1000.60	0
0.39847	1020.93	1
0.188677	1029.29	2
0.0618148	1031.85	3
-9.41233e-017	---
Ho:rank=p	-Tlog(1 - μ)	using T-nm	95%	-TΣlg(1- μ)	using T-nm	95%
p = 0	40.66^**	37.61^**	25.5	62.49^**	57.81^**	42.4
p <= 1	16.73	15.47	19.0	21.83	20.19	25.3
p <= 2	5.105	4.722	12.3	5.105	4.722	12.3
standardized β’ eigenvectors
LPX	LPM	LULC1	Trend
1.000	-0.2571	-0.6955	-0.001509
-1.501	1.000	0.6534	0.004645
-0.5015	-0.2140	1.000	-0.005447
standardized α coefficients
LPX	-0.4051	0.01234	-0.01561
LPM	-0.09079	-0.2763	0.01801
LULC1	0.05162	0.01011	-0.07275
long-run matrix Po=αβ, rank 1
	LPX	LPM	LULC1	Trend
LPX	-0.4051	0.1042	0.2817	0.0006114
LPM	-0.09079	0.02334	0.06314	0.0001370
LULC1	0.05162	-0.01327	-0.03590	-7.790e-005
General cointegration test. Restriction: β1 - β2 - β3 = 0
standardized β’ eigenvectors
LPX	LPM	LULC1	Trend
1.000	-0.2857	-0.7143	-0.0009893
standardized α coefficients
LPX	-0.4208
LPM	-0.004620
LULC1	0.07875
Restricted long-run matrix Po=αβ’, rank 1
	LPX	LPM	LULC1	Trend
LPX	-0.4208	0.1202	0.3006	0.0004163
LPM	-0.004620	0.001320	0.003300	4.570e-006
LULC1	0.07875	-0.02250	-0.05625	-7.791e-005
loglik = 1019.63 unrloglik = 1020.93
LR-test, rank=1: Chi²(≈0) = 2.5959 [1.0000]

Recursive Least Squares
Variable	Coefficient	Std. Error	t-value	t-prob	PartR²	Instab
Constant	-0.040913	0.010886	-3.758	0.0005	0.2473	0.04
D4LPX_1	0.48931	0.076979	6.356	0.0000	0.4844	0.06
ecpx_4	-0.26725	0.062013	-4.310	0.0001	0.3016	0.05
D4LFM	0.062723	0.012969	4.837	0.0000	0.3523	0.29
D4LULC1	0.079972	0.069299	1.154	0.2549	0.0300	0.05
D4LULC1_4	0.13359	0.044689	2.989	0.0046	0.1721	0.09
Trend	0.00016944	6.5837e-005	2.574	0.0136	0.1335	0.04
YGAP_4	0.0017433	0.00081768	2.132	0.0388	0.0956	0.04
D4YGAP	0.0023161	0.00044930	5.155	0.0000	0.3819	0.06
R2 = 0.965406 F(8, 43) = 150 [0.0000] σ = 0.00367755 DW = 1.71
RSS = 0.0005815465582 for 9 variables and 52 observations
Variance instability test: 0.230352; Joint instability test: 2.09728
Information Criteria: SC = -10.7172; HQ = -10.9254; FPE = 1.58651e-005
AR 1- 4F( 4, 39) =	2.161 [0.0915]
ARCH 4 F( 4, 35) =	2.7595 [0.0429]		*
Normality Chi²(2) =	1.1553 [0.5612]
Xi² F(16, 26) =	1.9203 [0.0674]
RESET F( 1, 42) =	0.44742 [0.5072]
Recursive	Instrumental	Variables	Estimation
Variable	Coefficient	Std. Error	t-value	t-prob
D4LULC1	0.044886	0.11213	0.400	0.6909
D4LPX_1	0.50367	0.085198	5.912	0.0000
ecpx_4	-0.26590	0.062288	-4.269	0.0001
D4LPM	0.063732	0.013251	4.810	0.0000
Constant	-0.040650	0.010938	-3.716	0.0006
D4LULC1_4	0.13508	0.044977	3.003	0.0044
Trend	0.00018835	8.1296e-005	2.317	0.0253
YGAP_4	0.0021256	0.0012617	1.685	0.0993
D4YGAP	0.0023455	0.00045662	5.137	0.0000
Additional Instruments used: MMV_4, LP_4, LW_4, LU_4, LPR_4, D4LULC1_1
σ = 0.00368849 DW = 1.71
RSS = 0.0005850133334 for 9 variables and 52 observations
2 endogenous and 8 exogenous variables with 14 instruments
Reduced Form σ = 0.00352734
Specification Chi²(5) =		11.073 [0.0499] ^*
Testing β = 0: Chi²(8) =		1191.7 [0.0000] ^**
Testing for Error Autocorrelation from lags 1 to 4
Chi²(4) = 9.134 [0.0578]
ARCH 4 F( 4, 35) =	2.4921 [0.0608]
Normality Chi²(2) =	1.4612 [0.4816]
Xi²F(16, 26) =	1.8205 [0.0846]

Recursive Least Squares
	Estimation sample is: 1982-89
	Forecast period is: 1990-94
Variable		Coefficient	Std. Error	t-value	t-prob	PartR²	Instab
Constant		-0.015842	0.018746	-0.845	0.4068	0.0301	0.03
D4LPX_1		0.35879	0.11236	3.193	0.0040	0.3071	0.03
ecpx 4		-0.22984	0.069691	-3.298	0.0031	0.3211	0.03
D4LPM		0.069951	0.015244	4.589	0.0001	0.4780	0.06
D4LULC1		0.057863	0.078843	0.734	0.4704	0.0229	0.03
D4LULC1_4		0.18902	0.064816	2.916	0.0078	0.2700	0.03
Trend		-0.00012513	0.00023981	-0.522	0.6068	0.0117	0.03
YGAP_4		0.0029489	0.0014576	2.023	0.0548	0.1511	0.04
D4YGAP		0.0032995	0.00089599	3.683	0.0012	0.3709	0.06
R² = 0.973655		F(8, 23) = 106.25 [0.0000]		σ = 0.00282975		DW = 2.21
RSS = 0.0001841716467 for 9 variables and 32 observations
Tests of parameter constancy over: 90 (1) to 94 (4)
Forecast Chi²(20) = 355.59 [0.0000] ^**
Chow F(20, 23) = 2.4813 [0.0190] ^*
t(19) for a zero Forecast innovation mean =					0.0642
Recursive		Instrumental	Variables	Estimation
	Estimation sample is:		1982-89
	Forecast period is:		1990-94
Variable		Coefficient	Std. Error	t-value	t-prob
D4LULC1		0.055571	0.10779	0.516	0.6111
D4LPX_1		0.36054	0.12564	2.870	0.0087
ecpx 4		-0.22946	0.070733	-3.244	0.0036
D4LPM		0.069976	0.015264	4.584	0.0001
Constant		-0.015868	0.018765	-0.846	0.4065
D4LULC1_4		0.18884	0.065092	2.901	0.0081
Trend		-0.00012249	0.00025431	-0.482	0.6346
YGAP 4		0.0029654	0.0015508	1.912	0.0684
D4YGAP		0.0032897	0.00094966	3.464	0.0021
Additional Instruments used: MMV_4, LP_4, LW_4, LU_4, LPR_4, D4LULC1_1
σ = 0.0028298 DW = 2.21
RSS = 0.0001841784142 for 9 variables and 32 observations
2 endogenous and 8 exogenous variables with 14 instruments
Reduced Form σ = 0.00288708
Specification Chi²(5) =			6.3108 [0.2771]
Testing β = 0: Chi²(8) =			849.73 [0.0000] ^**
Forecast Chi²(20) =			351.84 [0.0000] ^**

Recursive Least Squares
	Estimation sample is: 1982-89
	Forecast period is: 1990-94
Variable		Coefficient	Std. Error	t-value	t-prob	PartR²	Instab
Constant		-0.015842	0.018746	-0.845	0.4068	0.0301	0.03
D4LPX_1		0.35879	0.11236	3.193	0.0040	0.3071	0.03
ecpx 4		-0.22984	0.069691	-3.298	0.0031	0.3211	0.03
D4LPM		0.069951	0.015244	4.589	0.0001	0.4780	0.06
D4LULC1		0.057863	0.078843	0.734	0.4704	0.0229	0.03
D4LULC1_4		0.18902	0.064816	2.916	0.0078	0.2700	0.03
Trend		-0.00012513	0.00023981	-0.522	0.6068	0.0117	0.03
YGAP_4		0.0029489	0.0014576	2.023	0.0548	0.1511	0.04
D4YGAP		0.0032995	0.00089599	3.683	0.0012	0.3709	0.06
R² = 0.973655		F(8, 23) = 106.25 [0.0000]		σ = 0.00282975		DW = 2.21
RSS = 0.0001841716467 for 9 variables and 32 observations
Tests of parameter constancy over: 90 (1) to 94 (4)
Forecast Chi²(20) = 355.59 [0.0000] ^**
Chow F(20, 23) = 2.4813 [0.0190] ^*
t(19) for a zero Forecast innovation mean =					0.0642
Recursive		Instrumental	Variables	Estimation
	Estimation sample is:		1982-89
	Forecast period is:		1990-94
Variable		Coefficient	Std. Error	t-value	t-prob
D4LULC1		0.055571	0.10779	0.516	0.6111
D4LPX_1		0.36054	0.12564	2.870	0.0087
ecpx 4		-0.22946	0.070733	-3.244	0.0036
D4LPM		0.069976	0.015264	4.584	0.0001
Constant		-0.015868	0.018765	-0.846	0.4065
D4LULC1_4		0.18884	0.065092	2.901	0.0081
Trend		-0.00012249	0.00025431	-0.482	0.6346
YGAP 4		0.0029654	0.0015508	1.912	0.0684
D4YGAP		0.0032897	0.00094966	3.464	0.0021
Additional Instruments used: MMV_4, LP_4, LW_4, LU_4, LPR_4, D4LULC1_1
σ = 0.0028298 DW = 2.21
RSS = 0.0001841784142 for 9 variables and 32 observations
2 endogenous and 8 exogenous variables with 14 instruments
Reduced Form σ = 0.00288708
Specification Chi²(5) =			6.3108 [0.2771]
Testing β = 0: Chi²(8) =			849.73 [0.0000] ^**
Forecast Chi²(20) =			351.84 [0.0000] ^**

Period	Method
	RLS	RIV
1982-94	-0.75	-0.91
1982-89	-0.89	-0.90

Period	Method
	RLS	RIV
1982-94	-0.75	-0.91
1982-89	-0.89	-0.90

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Abstract

V. The Output Gap and Inflation 1/

1. Defining the “speed limit” effect

2. Estimating the inflation equations

3. Estimating the “speed limit”

STATISTICAL APPENDIX

V. The Output Gap and Inflation ^1/