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Post-Thatcher Fiscal Strategies in the U.K.: An Interpretation

  • Andrew Hughes Hallett

Fiscal policy in Britain has changed radically since the Keynesianism of the 1960s and 1970s. After a passive period under monetarism of the 1980s, fiscal policy is said to have adopted a leadership role with long term objectives (low debt, the provision of public services/ investment, and social equity), together with an independent central bank. Monetary policy, operating with instrument independence, then takes care of short run stabilisation. I test this view – confronting it with evidence from the institutional arrangements put in place since 1997; with econometric evidence from the policy responses themselves; and with theoretical evidence on the incentive to choose such a regime in the first place. I conclude that this claim is broadly correct. It appears that the UK’s improved performance is a consequence of the advantages of combining fiscal leadership with an (instrument) independent central bank. The key feature is the ability to trade target (not instrument) independence in monetary policy to secure greater coordination between fiscal and monetary strategies.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1372.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1372
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  1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  2. Buti, Marco & Eijffinger, Sylvester C W & Franco, Daniele, 2003. "Revisiting the Stability and Growth Pact: Grand Design or Internal Adjustment?," CEPR Discussion Papers 3692, C.E.P.R. Discussion Papers.
  3. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
  4. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Government Leadership and Central Bank Design," Vanderbilt University Department of Economics Working Papers 0208, Vanderbilt University Department of Economics, revised Dec 2004.
  5. repec:ner:tilbur:urn:nbn:nl:ui:12-152958 is not listed on IDEAS
  6. Andrew Hughes Hallett & Diana N. Weymark, 2005. "Independence Before Conservatism: Transparency, Politics and Central Bank Design," German Economic Review, Verein für Socialpolitik, vol. 6(1), pages 1-21, 02.
  7. Gerdesmeier, Dieter & Roffia, Barbara, 2003. "Empirical estimates of reaction functions for the euro area," Working Paper Series 0206, European Central Bank.
  8. A.J. Hallet, 1998. "When Do Target Zones Work? An Examination of Exchange Rate Targeting as a Device for Coordinating Economic Policies," Open Economies Review, Springer, vol. 9(2), pages 115-138, April.
  9. Robert J. Barro, 1980. "Output Effects of Government Purchases," NBER Working Papers 0432, National Bureau of Economic Research, Inc.
  10. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  11. Dieppe, Alistair & Kuester, Keith & McAdam, Peter, 2004. "Optimal monetary policy rules for the euro area: an analysis using the area wide model," Working Paper Series 0360, European Central Bank.
  12. Andrew Hughes Hallett & Diana N. Weymark, 2003. "Independent Monetary Policies and Social Equality," Vanderbilt University Department of Economics Working Papers 0307, Vanderbilt University Department of Economics.
  13. repec:ner:tilbur:urn:nbn:nl:ui:12-176184 is not listed on IDEAS
  14. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Policy Games and the Optimal Design of Central Banks," Vanderbilt University Department of Economics Working Papers 0220, Vanderbilt University Department of Economics.
  15. Gerlach, Stefan & Schnabel, Gert, 1999. "The Taylor Rule and Interest Rates in the EMU Area," CEPR Discussion Papers 2271, C.E.P.R. Discussion Papers.
  16. Hughes Hallett, A J, 1984. "Non-cooperative Strategies for Dynamic Policy Games and the Problem of Time Inconsistency," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 381-99, November.
  17. Avinash Dixit & Luisa Lambertini, 2003. "Interactions of Commitment and Discretion in Monetary and Fiscal Policies," Boston College Working Papers in Economics 575, Boston College Department of Economics.
  18. Dixit, Avinash, 2001. "Games of monetary and fiscal interactions in the EMU," European Economic Review, Elsevier, vol. 45(4-6), pages 589-613, May.
  19. Gilles Oudiz & Jeffrey Sachs, 1984. "Macroeconomic Policy Coordination among the Industrial Economies," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(1), pages 1-76.
  20. Brandsma, Andries S. & Hughes Hallett, A. J., 1984. "Economic conflict and the solution of dynamic games," European Economic Review, Elsevier, vol. 26(1-2), pages 13-32.
  21. Andrew Hallett & Nicola Viegi, 2002. "Inflation Targeting as a Coordination Device," Open Economies Review, Springer, vol. 13(4), pages 341-362, October.
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