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2004 OECD Economic Surveys: United Kingdom 2004

image of OECD Economic Surveys: United Kingdom 2004

OECD’s 2004 review of the UK economy finds that performance has been impressive in recent years.  The main challenges are to contain instability in the housing market, to spend public money more efficiently, and to close the productivity gap with the best performing OECD countries.  This edition also looks at product market competition and sustainable development in the UK. 

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Reducing the Risk of Instability from the Housing Market

Over the last couple of years the housing market has been a major consideration in the setting of monetary policy as demonstrated by numerous references in the minutes of the Monetary Policy Committee (MPC). The high interest rate sensitivity of the housing market strengthens considerably the transmission channel of monetary policy, in marked contrast with most continental European countries. On the other hand, there are a number of episodes over the last three decades when developments in the housing market have either been a cause of, or exacerbated, macroeconomic instability. The challenge is therefore to retain the inherent strength of the current framework, i.e. a strong reactivity to interest rate changes, while reducing its drawbacks in terms of potential instability and possible misallocation of resources in the long run. The government is committed to a comprehensive programme to improve the functioning of the housing market, addressing both supply and demand issues. Such measures are seen as encouraging greater convergence with the euro area economies, but are also considered “beneficial in their own right to improve the stability and flexibility of the United Kingdom housing market and wider economy.” The remainder of this chapter puts the UK housing market in international context, evaluates it as a source of macroeconomic instability, and finally considers what the appropriate policy response is, both in the current cycle and over the longer term...

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