Turning in the widening gyre: monetary and fiscal policy in interwar Britain

This paper brings together modern empirical techniques, a sign-restricted structural vector autoregression, with contemporary high frequency data to answer an old question – what role did macroeconomic policy play in Britain’s high unemployment and deflation in the years 1919 to 1938. Its specific innovation is to draw on a previously little-used weekly publication of public finance statistics, allowing the roles of taxation, public spending and monetary policy to be assessed side-by-side in a coherent framework. In a period of particularly unsettled policy the paper finds that policy shocks, both monetary and fiscal, made a material contribution to variation in prices and unemployment – and these played a central role in the two great recessions of the period, modern Britain’s most severe. Other policy choices could have delivered better outcomes for prices and unemployment – but these would have required making different choices in the face of conflicting objectives and some sharp trade-offs.