The Fisher Equation, Monetary Targets and Austerity

Take the Fisher Equation in its full non linearised form.


r denotes the real interest rate, i denote the nominal interest rate, and π denotes the inflation rate.

Is this a good target for monetary policy?

It is not because it does not measure the full numeraire effect of the money in circulation.  Its use has led to inflation consistently undershooting Central Bank targets.

A better target would be


Where g is the ratio of the deficit to the current broad money stock in circulation.

It linearise after two taylor expansions to the approximation


Its importance is because of the accounting identity that the public sector deficit is equal to the public sector surplus.

So if the deficit is expanding at less that the rate of growth then the deficit is sustainable.  Note it is the first derivative that matters, and when you have a delay between the rate of money destruction – the point in time taxation takes place, and the point of time it is spent, which you always have with annual budgets, then you will get a classic accelerator effect; a mere change in the rate of change in the deficit will be sufficient to cause a change in effective demand even though the deficit may still be growing.   The reduction in the rate of the deficit has led to an accelerated reduction in the numeraire effect causing deflation.

@MayorofLondon Plan Secret Plan to release 20,000 Green Belt Homes to fund Crossrail 2

In 2013 London First set up a task force to look at funding options for Crossrail which included releasing land for 70,000 homes in Chessington raing 1.6 billion pounds.  I wrote about that here.

Of course Mayor Khan stated in his election Campaign that the green Belt was ‘invilate’ so presumably he would be prepared to let Crossrail 2 fail  if there was a choice?

Not quite, the current hold up between the Treasury and TfL according to City AM

Rising tension between the government and Transport for London (TfL) over funding plans for Crossrail 2 is threatening to shunt the £31bn infrastructure project into the sidings.

TfL submitted its business and funding case for the new cross-London rail route to the government in March, but transport secretary Chris Grayling has yet to give the plan the go ahead.

Crossrail 2 planners had wanted a decision on it by the end of May to keep the timeline of the key railway link on track. In the mayor’s transport strategy, unveiled yesterday, Sadiq Khan said the government “must immediately” give the go-ahead for Crossrail 2. But City A.M. understands the Department for Transport (DfT) remains unconvinced by TfL’s current funding proposals…

Michele Dix, TfL’s managing director for Crossrail 2, said: “TfL submitted a revised business case to the secretary of state in March. It includes detailed proposals for a funding package where London funding streams pay for half of the total cost of Crossrail 2 as was agreed with the government. Our case is robust, and we will continue to work closely with the secretary of state as we develop our plans.”

A DfT spokesperson said: “As with all transport scheme proposals a thorough analysis is being carried out by the department to ensure it is a robust scheme. This includes examining whether the National Infrastructure Commission’s detailed recommendations on the scheme have been met. These considerations and further discussions are part of a normal ongoing process.”

Lets have a look at the NIC report from March 2016

Page 56

TfL has undertaken extensive work to explore how Crossrail 2 can facilitate the
delivery of housing. The following planning policy changes underpin Crossrail 2’s
housing case:

-Industrial land release: An increased rate of Strategic Industrial
Location (SIL) release for housing development.
– Density: An increase in the housing density levels applied by the
London Plan56 (including the intensification of existing housing estates)
l-Metropolitan Open Land/Green Belt release: Densification around
Crossrail 2 stations; including, where appropriate in specific cases, the
limited release of Metropolitan Open Land (MOL) and Green Belt land.

The report goes on.

Again, in relation to Green Belt release, changes are already being considered.

hile the Green Belt is protected under national planning policy as well as the London Plan (MOL is protected by the London Plan), a number of local authorities- including some on the Crossrail 2 route – are already reviewing Green Belt designations. The Crossrail 2 Growth Commission notes that the future role of the Green Belt is not an issue confined to Crossrail 2 and will need to be considered further as part of the London Plan and other local and national planning

National Infrastructure Commission report | Transport for a world city
processes.59 The release of limited parcels of such land around Crossrail 2 and connecting stations currently contributes at least 10% to Crossrail 2’s housing goal of 200,000 new homes, but a co-ordinated approach across local authorities on the release of land for development is again needed.

The scope for development and densification along the line, in southwest
London and outside London to the north-east and north-west, is also large and includes areas such as Chessington and Tolworth. Significant opportunities exist outside the Greater London boundary. 75,000 of the 200,000 homes potentially unlocked by Crossrail 2 are outside Greater London into Surrey and Hertfordshire. New housing will come from both new developments and the intensification of existing housing areas and town centres along the route.

The release of limited parcels of such land around Crossrail 2 and
connecting stations currently contributes at least 10% to Crossrail 2’s housing goal of 200,000 new homes, but a co-ordinated approach across local authorities on the release of land for development is again needed. (page 58).

The reference here is to TfL, Crossrail 2 Business Case, 2015 which is not publicly available.  A question the Treasury is surely asking is why 20,000 not the 70,000 the Crossrail Growth commission identified, especially as the potential loss of over 1 billion pounds in funding could mean key Stations such as Kings Roads may now be dropped (after all it is the former Hackney Chelsea line).  Now where Mayor are these 20,000, and where are the other 50,000 you dropped?    The likelihood is the Mayor is only considering  relatively small releases around Chessington South Station.