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The U.K.'s rocky road to stability

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  • Nicoletta Batini
  • Edward Nelson

Abstract

This paper provides an overview, using extensive documentary material, of developments in U.K. macroeconomic policy in the last half-century. Rather than focusing on well-known recent changes in policy arrangements (such as the introduction of inflation targeting in 1992 or central bank independence in 1997), we instead take a longer perspective, which characterizes the favorable economic performance in the 1990s and 2000s as the culmination of an overhaul of macroeconomic policy since the late 1970s. We stress that policymaking in recent decades has discarded various misconceptions about the macroeconomy and the monetary transmission mechanism that officials held in earlier periods. The misconceptions included: an underestimation of the importance of monetary policy in demand management until 1970; a failure to distinguish real and nominal interest rates until the late 1960s; the deployment until the mid-1980s of ineffective monetary control devices that did not alter the monetary base; and the adherence by policymakers in the 1960s and 1970s to nonmonetary views of the inflation process. We also consider developments in fiscal policy in light of changes in the doctrines underlying U.K. macroeconomic decisions.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2005-020.

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Date of creation: 2005
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Handle: RePEc:fip:fedlwp:2005-020

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Keywords: Monetary policy - Great Britain ; Inflation (Finance) - Great Britain;

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Cited by:
  1. Shah, Ajay, 2008. "New issues in Indian macro policy," Working Papers 08/51, National Institute of Public Finance and Policy.
  2. Benati, Luca & Mumtaz, Haroon, 2007. "U.S. evolving macroeconomic dynamics: a structural investigation," Working Paper Series 0746, European Central Bank.
  3. Assenmacher-Wesche, Katrin, 2006. "Estimating Central Banks' preferences from a time-varying empirical reaction function," European Economic Review, Elsevier, vol. 50(8), pages 1951-1974, November.
  4. Garratt, Anthony & Koop, Gary & Mise, Emi & Vahey, Shaun P., 2009. "Real-Time Prediction With U.K. Monetary Aggregates in the Presence of Model Uncertainty," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 480-491.
  5. Charlotta Groth & Jarkko Jääskelä & Paolo Surico, 2006. "Fundamental inflation uncertainty," Bank of England working papers 309, Bank of England.
  6. Benati, Luca, 2009. "Would the Bundesbank have prevented the Great Inflation in the United States?," Working Paper Series 1134, European Central Bank.

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