of policy rules, half of

Figure XIV.2 shows that, with the initial design of policy rules, half of a sustained 1 per cent disturbance on the balance of payments is eliminated in about five quarters. It takes another two quarters to recover from it completely, but there is then a further deviation, which lasts about ten quarters. The induced deviations of Money GDP and unemployment are within our initial specifications. The system 'settles' (on target because of 'integral action') in about twenty quarters. The movement of the exchange rate is at the limit of acceptability, being just over 5 per cent in the first quarter. In the long term, an exogenous fall of 1 per cent in the balance of payments is corrected by reducing the exchange rate by 3.4 per cent and the wage rate by 0.6 per cent, and by increasing the rates of tax and national insurance contributions by about 0.6 per cent and 1.2 per cent, respectively. These long-run instrument movements are consistent with the parameter values of the non-linear model.