Comments and Discussion

Baily, Martin Neil
June 1981
Brookings Papers on Economic Activity;1981, Issue 2, p368
Academic Journal
This article focuses on issues concerning the economic policy and performance in Great Britain. Analysis of the economic events of 1979 to 1981 within a sticky wage and price framework and the basic argument about what went wrong is fairly straightforward wherein monetary and fiscal policy reduced the level of nominal demand. Since wages and prices were sticky, this translated into a decline in real output, an increase in unemployment, and a moderate abatement of inflation. Willem Buiter and Marcus Miller argues that the narrow M1 measure of money is better than the broader M3 measure (used by the government in its setting of targets) and hence that the sharp deceleration of M1 growth indicates a tight policy but it is believed that the key to the British experience is the surge in the price level wherein the most striking fact is the decline in the real money stock by all measures, by refusing to accommodate the change in the price level, the government in a sense acquiesced in a very tight monetary policy. The role of the foreign trade sector and the exchange rate in the decline of output and employment is interesting wherein the value of sterling rose sharply compared with the major trading partners of Great Britain. Since wages were also rising rapidly, the result was that the index of relative unit labor costs of the International Monetary Fund for Great Britain was up 40 percent in 1980 over 1978. Somewhat surprisingly, this dramatic change in competitiveness did not show up very strongly in import or export volumes.


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