Market Monetarists in general, and Lars Christensen in particular, are paying a lot of attention on what´s going on in the UK following Mark Carney´s famous December 11 speech when the NGDP-LT alternative for monetary policy in the UK latter this year was discussed mentioned.
So I thought it would be useful, maybe just interesting, to ‘fly over’ the last half-century of the UK economy (Britmouse will forgive me and correct me if I make outrageously wrong comments).
I divide the 1965 2012 period in three: 1965-1992, 1993-2007 and the post 2008 years. That´s not the best division since it troughs the big changes that took place when Maggie came to power in with all the mishaps that went on before.
The table below gives useful statistics for the different periods: mean RGDP growth (yg) and it´s standard deviation (volatility) (sdy) and average inflation and volatility (p, sdp).
|
Period |
yg |
sdyg |
p |
sdp |
|
1965 – 1992 |
2.4% |
2.4 |
8.5% |
5.5 |
|
1993 – 2007 |
3.3% |
0.8 |
1.8% |
0.6 |
|
2008 – 2012 |
-0.5% |
2.6 |
3.3% |
0.9 |
Clearly, Britain´s “Great Moderation” went on from 1993 to 2007. The inflation rate in 2008-12 looks like an anomaly. I refer those interested to a post I wrote two years ago that does a good job (I think) of explaining the recent UK inflation ‘disconnect’.
The charts below show the time series of the two variables by period. The scale is the same so as to make comparison easy and highlight the changes. The only ‘shout’ is the famous 364 Economist´s letter of 1981 saying that the Tory Budget would be the ‘end of Britain’. Clearly, nothing of the sort happened, quite the contrary. After the ill-fated ERM/EMU experiment of 1990-92, that ended making George Soros a billionaire, Britain embarked on the “Great Moderation”. In the years from 1965 to 1992, NGDP had first trended up and then down. After 1992 it became ‘eerily’ stable, and everything else with it!
The next chart shows the NGDP ‘Big Bang’. Go to Lars´ linked post to get hints about what could, can, or should be done to remedy the problem. Anyway, from what went on ‘before’ and ‘after’ and what happened “now”, advocating a stable NGDP level path is not outrageous at all. In fact it was behind that façade that Inflation Targeting ‘blossomed’.
The last chart (monthly data) highlights the “Chuck Norris” (aka Mark Carney) effect very clearly. And, according to Lars, that´s only the ‘tip of the iceberg’.
Very nice, Marcus. No arguments from here although I prefer to use the GDP deflator rather than the CPI since the two diverged before and after 2008, though in opposite directions.
Yes a division at 1981 is cleaner, but even then there were two macro policy screwups (Lawson Boom, ERM) before inflation targeting took over in 1992/93; minor by 1970s standards, but still.
The mid-1980s are particularly interesting because Lawson (encouraged by Sam Brittan) looks like he was fairly open about trying to stabilise NGDP growth. http://uneconomical.wordpress.com/2012/04/27/bring-back-nigel-lawson/
Thanks Brit. I know the 80s were ‘rich’. As Tim Congdon tells, there was the Keynesian ‘defeat’ to monetarism in 1981 and then the ‘spat’ among monetarists that led to the Lawson boom and ERM.
But I really wanted to highlight the 1993-07 period. It´s even ‘cleaner’ than the US “Great Moderation”.
Yes, extremely good policy up to 2007, sailing past minor disasters elsewhere in the world. Yet strangely the main excuse for the recession in 2008 was “the yanks did it”!