Analysing Narrow Money

When Nigel Lawson was appointed Chancellor of the Exchequer in the summer of 1983, immediately after the return of the Conservative party to a second term of office, he embarked upon a review of the Medium Term Financial Strategy (MTFS). The authorities had realised, when they first introduced the MTFS, that ‘no single statistical measure of the money supply can be expected fully to encapsulate monetary conditions, and so provide a uniquely correct basis for controlling the complex relationships between monetary growth and prices and nominal incomes’1. Certainly, as discussed in the previous chapter, interpretation of £M3 had proved particularly difficult in the early 198Os. In 1982 this was given explicit recognition by the introduction of M1 and PSL2 as supplementary monetary targets. Furthermore, the authorities came to stress more strongly the importance of the examination of a range of financial and economic variables when judging the stance of monetary policy. These included such variables as the exchange rate, asset prices and the behaviour of inflation itself.