Staff Working Paper No. 968
By David Ronicle
This paper brings together modern empirical techniques with contemporary high-frequency data to fill two prominent gaps in the literature on Britain’s interwar years: what were the quantitative effects of monetary policy on unemployment and prices in the years 1919 to 1938; and, how did that compare to the effects of fiscal policy? Its specific innovation is to draw on a previously little-used weekly publication of public finance statistics, allowing the roles of monetary policy, taxation and public spending to be assessed side-by-side in a coherent framework – a structural vector autoregression identified with sign restrictions. In a period of particularly unsettled policy, I find that policy shocks, both monetary and fiscal, made a material contribution to variation in prices and unemployment and played a central role in the two great recessions of the period, modern Britain’s most severe. Other macroeconomic policy choices could have delivered better outcomes for prices and unemployment, but this would have required making different choices in the face of conflicting objectives and some sharp trade-offs.
This version was updated in February 2024. The Staff Working Paper was first published on 25 March 2022 under the title ‘Turning in the widening gyre: monetary and fiscal policy in interwar Britain’.
Macroeconomic policymaking in interwar Britain: a reappraisal
