Muddling through or Tunnelling Through? UK Monetary and Fiscal Exceptionalism during the Great Inflation
Abstract
"The recent resurgence in inflation in the US and UK has resonance with the Great Inflation of the 1960s and 70s. The UK's inflation experience in the 1960s and 1970s was one of the worst of the advanced countries, and unique in both scale and incidence. This paper reconsiders the historical and empirical record of inflation in the UK from 1950s to the early 1990s through the lens of recent advances in economic theory, focusing on the role of monetary and fiscal policy interactions.Retrospectively, it is not clear that a tighter monetary policy alone would have been sufficient to reduce underlying inflation expectations, without changes in the fiscal regime. In the mid-1970s primary public sector deficits were used to absorb and mitigate the implications of high energy prices with little or no attention paid to stabilising the debt in the longer term. The major shifts down in expectations in the later 1970s and early 1980s only occurred following major changes in the fiscal policy framework, reflecting the introduction of cash limits on government spending, the benefits of North Sea Oil revenues and the abandonment of fiscal policy as a stabilisation tool and its subordination to monetary policy. This appears consistent with Sargent’s (1981) view that moderately large inflations are brought fundamentally to an end as much by changes in the fiscal policy regime as the monetary policy regime, and an acceptance of that regime by all participants in the economy.
Paper: https://www.atlantafed.org/-/media/documents/news/conferences/2022/05/23/monetary-and-financial-history-workshop/bordo-bush-thomas.pdf"