Monetary versus Macroprudential Policy: Causal Impacts of Interest Rates and Credit Controls in the Era of the UK Radcliffe Report
With David Aikman and Alan M. Taylor · Reject and resubmit, American Economic Review
How do interest rates and credit controls affect the economy when they are
used together? We study Britain from the 1950s to the 1980s, when
policymakers relied on both Bank Rate and direct controls over bank lending.
We construct a new historical policy dataset and use a factor-augmented
local-projection approach to identify the effects of the two instruments.
Monetary tightening primarily reduced inflation, while credit controls
primarily reduced bank lending and output. The results show that the
instruments were not close substitutes, despite policymakers often treating
them as such, and help explain the limitations of Britain's anti-inflation
strategy during the Great Inflation.
NBER record
Bank of England working paper
Fiscal Financing Regimes and Nominal Stability: An Historical Analysis
Oliver Bush · Centre for Macroeconomics Discussion Paper 2025-31
This paper asks how governments finance fiscal expansions and why the answer
matters for inflation. It compares two British regimes: the Gold Standard
era, when policymakers expected higher debt to be backed by future primary
surpluses, and the Great Inflation, when fiscal policy was used primarily to
manage demand, employment and growth. Narrative evidence from policymakers'
stated objectives is combined with empirical estimates of how fiscal balances
and prices responded to fiscal shocks. Fiscal expansions were eventually
backed in the Gold Standard regime. In the Great Inflation regime they were
not, and unexpected inflation played an important role in stabilising the
public finances.
Paper
Non-technical summary
LSE record
‘Muddling Through or Tunnelling Through?’ UK Monetary and Fiscal Exceptionalism and the Great Inflation
With Michael D. Bordo and Ryland Thomas · NBER Working Paper 34063
Why was Britain's Great Inflation so persistent? Standard accounts emphasise
unusually large shocks, monetary-policy mistakes and ineffective incomes
policies. We reassess the historical and empirical record from the 1950s to
the early 1990s and find that these explanations do not fully account for the
persistence of inflation and inflation expectations. The evidence instead
points to a sequence of regime changes in fiscal as well as monetary policy.
During the Great Inflation, fiscal policy ceased to stabilise the public
finances and was used to sustain employment and growth, cushion
terms-of-trade shocks and support agreements with organised labour. The
British case shows why the fiscal foundations of nominal stability matter.
NBER paper
Abstract and citation
A Narrative Account of the Great Inflation in the UK, 1961–1997
With Michael D. Bordo and Ryland Thomas · NBER Working Paper 34363
This paper provides a detailed narrative of Britain's Great Inflation from
1961 to 1997. It documents the economic conditions at the outset, the
distinct phases of the inflation, the features that made the UK different
from other advanced economies, and the interaction of fiscal, monetary and
incomes policies. By placing each inflationary episode in its institutional
and historical setting, the paper supplies a qualitative companion to our
analytical work on the fiscal roots of the Great Inflation and contributes to
continuing debates over the causes and consequences of persistent inflation.
NBER paper
Abstract and citation