A Critique of Monetary Policy: Theory and British Experience

A Critique of Monetary Policy: Theory and British Experience

A Critique of Monetary Policy: Theory and British Experience

A Critique of Monetary Policy: Theory and British Experience


This book is both a theory of monetary policy and an examination of how it has worked in the UK. Written from direct experience of working in a central bank it challenges some of the accepted wisdoms of monetary theory.


I was Economics Director at the Bank of England from early 1973 until early 1981, and for the next three years performed the same role as Economic Adviser to the Governor. Thus, I saw in, and slightly outstayed, Lord Richardson's ten years as Governor of the Bank, and saw events from within the Bank for most of the period covered by this study.

The book is a co-operative effort by myself and Iain Saville. He was formerly a member of the Bank's Economic Section, and was granted leave of absence by the Bank in accordance with its policy of encouraging its staff to move for periods to work outside. However, he returned to the Bank when the work was half done; its completion and revision thus had to be carried out without his full assistance, and the drafting is mostly mine. Nevertheless, this study of monetary policy is very much a joint result of our collaboration, and represents our shared conclusions. the essence of the argument is contained in Chapters 2 , and 11 . These especially are the product of close discussion between us and repeated exchanges of drafts, to the point where, as with all successful collaborations, it is impossible for either to feel sure what each contributed. After Iain Saville left Robert Anderton acted as research officer, and we are both indebted to him for his help with the task of completing the work.

Our analysis leads us to the conclusion that the ten-year experiment with monetary targets was pursuit of a false trail. Grounds for some disillusion were apparent as early as 1973 when the Corset was imposed. Since then, the difficulty of controlling bank lending has become increasingly obvious, and our work may be seen essentially as an analysis of the implications of that observation. That, however, is not the same as saying that we felt or knew at the time what we feel or think we know now.

The advice we offered, and the views we held five or ten years ago, cannot, then, be inferred from what we say now. That may not be obvious and may easily be ignored, and I will cite one illustration. Although the book implies various objections to the idea of monetary targets, when targets were announced in 1976 I was among those most in favour of the innovation, which many then doubted. My reason was, admittedly, not that it would be counter-inflationary; rather that, in face of an evident tendency by the Bank simply to accommodate to events, it would lead the monetary authorities to define their aim and thus have a policy.

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