mr. king examines the impact of the recent turbulence in international financial markets on the uk economy speech by mr. mervyn king, a deputy governor of the bank of england, to the national council of building material producers in london on 21 / 10 / 98. few industries have suffered more from volatility of the british economy than yours, and the past few months have been more volatile than most. “ the times they are a - changing ” would be an appropriate theme tune for all of us. what has changed the economic climate over the past two to three months? here at home the most obvious sign has been a sudden decline in business and consumer confidence. the fall in the cbi ’ s measure of business optimism over the last two quarters is the largest seen since the early 1980s. the level of consumer confidence appears more robust, but it too has also fallen since the middle of this year. what has changed the economic climate over the past two to three months? here at home the most obvious sign has been a sudden decline in business and consumer confidence. the fall in the cbi ’ s measure of business optimism over the past two quarters is the largest since the early 1980s. the level of consumer confidence appears more robust, but it too has fallen since the middle of this year. away from home, the major development has been increased fragility in the international economy. following the default on its debt by the russian government, the imposition of capital controls by malaysia, and the near collapse of the hedge fund long term capital management, financial markets world - wide have exhibited extraordinary volatility, driven by a fear of risk, a flight to quality and liquidity, and the beginning of a significant reduction in leverage by financial institutions. what does this turbulence mean for the british economy? before answering that question, i want to say a few words about the monetary policy committee. just under two weeks ago, the monetary policy committee, for the first time in its short history, cut interest rates. when i accepted your invitation to speak today, i did not know that i would be able to explain to you the reasons behind our latest decision. for, until today, the minutes of our meetings were published with a lag of some five to six weeks. but, as the bank announced earlier this month, the minutes will now be published only two weeks after the monthly meetings. and the minutes from our meeting on 7 - 8 october were published at 9. 30 a. m. this morning

recession, or even in response to subpar growth, becomes an empirical matter. however much they do, we have another stabilizer for the economy. as demand growth heats up, the central bank will raise short - term rates to try to limit the boom and the resulting inflation. as recessions threaten, the central bank will lower short - term rates to try to limit the downturn. discretionary fiscal policy? with this long - run strategy in place, and with at least two shock absorbers - - one monetary, one fiscal - we are now ready for the sixty - four dollar question. in the average recession, should there be additional discretionary fiscal actions? for such actions to be effective, they must satisfy three conditions : • they should stimulate spending. • they should be instituted quickly. • they should be reversed quickly or automatically. the reason speed and reversibility are important is that most recessions are not very long, averaging about twelve months in the united states. if some expansionary action comes into effect late in a recession, say in the twelfth month, it is likely to add to the vigor of the next expansion and hence increase business - cycle volatility. reversibility is also important because of the overall budget rule discussed earlier. if the general budget were already in approximate balance, any continuing expansionary fiscal action taken on top of that would generate normal deficits, not normal budget balance. there is a limited set of fiscal actions that satisfy all these conditions. many of the commonly discussed proposals fall short on at least one ground. by way of illustration, i will discuss a few that have been mentioned in recent debates. extend unemployment insurance. unemployment insurance benefits run out after twenty - six weeks in the united states. in general having a time limit to control caseloads is helpful - - the basic idea of unemployment insurance is to provide temporary, not permanent, support to unemployed workers. but in recessions, when unemployed workers have much more difficulty in getting new jobs, it may make sense for policy to be more lenient by extending time limits. such extensions have been enacted in nearly all postwar u. s. recessions. the extensions would provide benefits to unemployed workers who might have trouble maintaining their pre - unemployment standard of living, implying that the extensions should stimulate consumption spending. the extensions, say to thirty - nine weeks, could be made for a defined period, such as a year. even if the period exceeded a year, most of the budget dollars would