Download Monetarist Experiment in the UK: Inflation, Exchange Rates, and Economic Policy and more Slides Banking and Finance in PDF only on Docsity! SRAS (Pe = P0) AD0 P0 P2 Y* AD1 Y P LRAS (Pe = P1) SRAS (Pe = P2) P1 Y’ 1979-80 1980-82 1986 Painless disinflation? Instant adjustment (NCM)? Docsity.com Analytical apparatus appropriate to financial markets: • Asymmetrical information • Rational expectations NCM, etc., tried to transpose all this to wider economic sphere. Clearly the instant adjustment mechanisms did not operate. Fallback position was ‘gradualism’: MTFS: Progressively declining targets for MS. Docsity.com Defining Money. Commodity money / precious metals, no problem. But development of financial system / credit: → Many different ways of conducting transactions. → Question: M no longer readily identifiable? Just a continuum of forms of liquidity / ways of transacting? If money does still exist, what is to be included in it? M0, M1, M3, £M3, M4…? Docsity.com Goodhart’s Law in action. Broad Money / Sterling M3 (and its successor M4): Soon lost all relation with π and with y! ‘Goodhart’s Law’: Choose symptom as indicator of a problem: Try to exploit it for policy purposes. → Symptom will cease to be good indicator of the problem! Thus: Observed regularity between a monetary aggregate and π. → Monetary authorities try to exploit it for policy purposes. Financial innovation, etc. → Financial institutions find other ways of transacting! Docsity.com From 1983, BoE shifted emphasis to narrow money / MB / M0. Was behaving utterly differently from broad money: M0 and M4 velocities of circulation M 0 ve lo ci ty M 4 velocity 10 15 20 25 30 35 1970 1975 1980 1985 1990 1995 2000 0.80 1.00 1.20 1.40 1.60 1.80 2.00 2.20 2.40 M0 velocity M4 velocity MP: Too tight? Not too tight? Debates becoming unreal! Docsity.com i.e. cannot target both i and M. Must choose one or other. MP in fact tacitly shifting away from less urgent π towards ER. January 1985 Sterling crisis / collapse. → policy shift openly admitted. i.e. Monetarism officially ‘dead’ in UK. Docsity.com Assessment: ‘real’ effects of the monetarist experiment in UK. ER overshooting / effect on export sector. Intensified broader effect / shift from tradables to non- tradables. Distributional effects, e.g. from income tax to VAT. Creation of pool of long-term unemployed. From 1982-3: •π pressures weakening anyway. •Exchange rates becoming the major policy issue again. •→ New M0 target overtaken by abandonment of ‘doctrinaire’ monetarism. Docsity.com High u effectively admitted to have been an anti-π tool. Now claimed ‘successful’. BUT: Oil prices steadying, then declining, then crashed (1985/6). → Question: “What stopped the inflation? Unemployment or commodity prices?” (Beckerman and Jenkinson article, 1986.) i.e. Not deflationary / ‘monetarist’ policies countries? Growth also began to resume. The 1983 pre-election e was effectively reflationary: Back to old political cycle / exploiting the Phillips curve! Docsity.com
