The challenge is to connect monetary and fiscal policy to promote demand while enhancing supply
Sterling is falling. Hurrah! The needed rebalancing of the UK economy calls for a further depreciation of the real exchange rate. If the call by Sir Mervyn King, governor of the Bank of England, for £25bn in asset purchases at the February meeting of the Monetary Policy Committee delivers a significant decline in sterling, he has delivered a lucky policy strike, despite being outvoted.
Sir Mervyn laid out requirements for a durable economic recovery in his presentation of the inflation report earlier this month: “We must focus our efforts in two areas. The first is to put in place measures aimed at boosting the supply capacity of our economy … The second is to find ways of boosting overseas demand for our products in order to bring about the rebalancing that the UK economy needs to see.”