I say this because, in principle, the difference between the fiscal policies of the two main parties should be generating volatility.
Whereas the Conservatives are aiming at a surplus on the overall Budget by 2019-20, Ed Miliband last week promised only a surplus on the current budget, implying that Labour would borrow to fund infrastructure spending. This could mean that overall net borrowing under Labour will be around 2 per cent of GDP higher than it would be under the Conservatives.
This should mean higher gilt yields. This is not because Labour's plans lack "credibility". It's simply because a less tight fiscal policy should mean higher aggregate demand and - in the Bank of England's view - higher aggregate demand causes higher inflation which in turn should mean higher interest rates. The Conservatives favour "fiscal conservatism and monetary activism", Labour less so.
Because gilt yields should be equal to the expected path of short-term interest rates, Labour's policy should mean higher gilt yields than the Conservatives'. This should be generating gilt market volatility now, because small changes in expectations of the election outcome should cause big changes in gilt yields.
How big? For a given inflation target, it depends upon two things. One is the size of the fiscal multiplier. The bigger this is, the more a fiscal tightening depresses demand and so the lower interest rates must be to offset this. The other is the sensitivity of demand to interest rates. If a small rise in interest rates has a big impact on GDP, then interest rates don't need to change much in response to a difference in fiscal policy.
Let's put some numbers on this. Economists at the Bank of England estimate that a percentage point rise in Bank rate reduces GDP by 0.6 per cent. The IMF has estimated that, early in the crisis, multipliers were "substantially above one". If we take a multiplier of 1.2, this implies that a two percentage point difference in the fiscal stance in 2019-20 requires interest rates to be four percentage points higher.
A Labour government, therefore, means higher gilt yields than a Conservative government - around two percentage points higher for five-year maturities in May, if we assume a smooth upward path in short rates.
This is a big enough difference to be generating volatility in gilts now. But this isn't happening. Quite the opposite. Gilts have been unusually stable. In the last six months, the average weekly change in five-year yields (regardless of direction) has been 0.08 percentage points. This is actually less than the average weekly change since 1990.
Which poses the question: why is the market so relaxed about the possibility of a big change in interest rates?
One reason is that the actual difference in fiscal policy might not be as great as the parties' stated positions imply. A survey by the Centre for Macroeconomics found that 82.2 per cent of economists think the planned cuts in public spending announced in the Autumn Statement are too big to be credible. Perhaps the Conservatives aren't really much more fiscally conservative than Labour.
A second possibility is that the fiscal multiplier won't be as big as I've assumed. IMF research has found that multipliers are generally smaller in economic upturns than they are in recessions. The smaller the multiplier, the smaller is the difference in interest rates for a given difference in fiscal policy.
A further possibility is that there are global forces holding yields down. One is the weakness of the euro area - especially to the extent that this might eventually lead to full-blown quantitative easing. Another, not unrelated to the euro area's woes, is secular stagnation: an on-going dearth of profitable investment opportunities in the real economy around the world could continue to hold down interest rates. In such an environment a looser fiscal policy wouldn't lead to much higher interest rates as it might instead be a necessary way of offsetting recessionary pressures.
Whatever the reason, the message here is the same: whereas politicians and political reporters think there's a big difference between the two main parties, financial markets don't.
