The U.K.'s Rocky Road to Stability

FRB of St. Louis Working Paper No. 2005-020A

116 Pages Posted: 29 Jul 2005

See all articles by Nicoletta Batini

Nicoletta Batini

International Monetary Fund (IMF)

Edward Nelson

Board of Governors of the Federal Reserve System

Date Written: March 2005


This paper provides an overview, using extensive documentary material, of developments in U.K. macroeconomic policy in the last half-century. Rather than focusing on well-known recent changes in policy arrangements (such as the introduction of inflation targeting in 1992 or central bank independence in 1997), we instead take a longer perspective, which characterizes the favorable economic performance in the 1990s and 2000s as the culmination of an overhaul of macroeconomic policy since the late 1970s. We stress that policymaking in recent decades has discarded various misconceptions about the macroeconomy and the monetary transmission mechanism that officials held in earlier periods. The misconceptions included: an underestimation of the importance of monetary policy in demand management until 1970; a failure to distinguish real and nominal interest rates until the late 1960s; the deployment until the mid-1980s of ineffective monetary control devices that did not alter the monetary base; and the adherence by policymakers in the 1960s and 1970s to nonmonetary views of the inflation process. We also consider developments in fiscal policy in light of changes in the doctrines underlying U.K. macroeconomic decisions.

Keywords: U.K. monetary policy, U.K. fiscal policy, inflation, instruments of monetary policy

JEL Classification: E51, E52, E60, E65

Suggested Citation

Batini, Nicoletta and Nelson, Edward, The U.K.'s Rocky Road to Stability (March 2005). FRB of St. Louis Working Paper No. 2005-020A. Available at SSRN: or

Nicoletta Batini

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Edward Nelson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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