The Thatcher Era: Monetarist Policies and Economic Transformation in the UK, Slides of Banking and Finance

Download The Thatcher Era: Monetarist Policies and Economic Transformation in the UK and more Slides Banking and Finance in PDF only on Docsity! Phase 1: Doctrinaire monetarism DMP policies of ‘Stop-Go’ era were declared abandoned: • Priorities reversed: from u / countering cycle to reducing π – ‘Public Enemy No. 1’ → All MP to focus on πe Aim: reduce inflationary expectations • πe↓ → workers reduce wage demands → reduce π. ‘Medium-Term Financial Strategy’ (MTFS): • Tighten control on MS / modest growth only. • Well-publicised targets. • Loudly-proclaimed determination to maintain targets. Docsity.com Inflationary pressures when Thatcher government to power, May 1979: Financial deregulation and innovation – CCC, etc. Loose MP and FP (‘Barber boom’). Breakdown of BW fixed (‘adjustable peg’) ER system. W π; industrial actions – miners, etc.; 1978-9 ‘winter of discontent’. Continuing high oil price since 1973-4 ‘shock’. Petro-$ markets. Docsity.com Phase 2: ‘Pragmatic monetarism’ By 1982: Thatcher government’s commitment to monetarist policies beginning to waver: • u > 3m • π easing → Tacit reversion to DMP / expansionary MP By mid-1980s: Monetarist policy / targeting MS effectively abandoned. Shift towards ER targeting. Docsity.com Continuing ‘supply-side’ policies to free up market forces • Continued to reduce G – ‘cuts’ • Increase incentive to work through T↓ • Reduce power of labour – miners’ strike 1984-5, etc. • Reduce UB • Encourage competition: Privatisation Deregulation Equivalent set of policies in US: ‘Reaganomics’. Docsity.com Continuing ‘supply-side’ policies to free up market forces • Continued to reduce G – ‘cuts’ • Increase incentive to work through T↓ • Reduce power of labour – miners’ strike 1984-5, etc. • Reduce UB • Encourage competition: Privatisation Deregulation Equivalent set of policies in US: ‘Reaganomics’. Docsity.com (3) Economic growth. By early 1982, UK recession exceptionally severe. Even compared with Germany (‘π-averse’!): Docsity.com (4) BOP fig -5 -4 -3 -2 -1 0 1 2 3 4 5 1970 1975 1980 1985 1990 1995 2000 C ur re nt a cc ou nt b al an ce :% o f G D P USA Japan UK BOP as % of GDP in selected countries Late 1980s boom sucked in imports → massive BOP deficit Assessment of the Thatcher era Docsity.com Late 1980s: recovery became boom / ‘Lawson boom’. → Scope for expanding G But FP remained tight → ‘bubbles’ instead: • House price inflation • Consumer goods • Stock Market bubble (‘burst’ October 1987, but recovered). Short-term pain → long-term gain? (Early 1980s claim): BUT: ‘Pain’ was prolonged / avoided in other countries ‘Gain’ was more of a bubble? Assessment of the Thatcher era / balance of pain and gain: The late 1980s boom Docsity.com