September/October 2009 Volume 91, Number 5, Part 2
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II Federal REVIEWReserve Bank of St. Louis SEPTEMBER/OCTOBER 2009 VOLUME 91, NUMBER 5, PART 2 A peer-reviewed series incorporating research R II from across the Federal Reserve System EVIEW Milton Friedman and U.K. Economic Policy: 1938-1979 Edward Nelson SEPTEMBER/OCTOBER 2009 • V Do Macroeconomic Announcements Move Inflation Forecasts? Marlene Amstad and Andreas M. Fischer Challenges in Macro-Finance Modeling Don H. Kim Investment Analysts’ Forecasts of Earnings OLUME Rocco Ciciretti, Gerald P. Dwyer, and Iftekhar Hasan 91 N UMBER 5 P ART 2 465 Milton Friedman and REVIEW II U.K. Economic Policy: 1938-1979 Edward Nelson Review Editor-in-Chief 507 William T. Gavin Do Macroeconomic Announcements Federal Reserve Bank of St. Louis Move Inflation Forecasts? Marlene Amstad and Andreas M. Fischer Editorial Board Charles T. Carlstrom Federal Reserve Bank of Cleveland 519 Challenges in Macro-Finance Modeling Julie Hotchkiss Don H. Kim Federal Reserve Bank of Atlanta Marco Del Negro Federal Reserve Bank of New York 545 Donald P. Morgan Investment Analysts’ Forecasts of Earnings Federal Reserve Bank of New York Rocco Ciciretti, Gerald P. Dwyer, and Iftekhar Hasan John Rogers Board of Governors of the Federal Reserve System Steven D. Williamson Washington University in St. Louis Managing Editor George E. Fortier Editors Judith A. Ahlers Lydia H. Johnson Graphic Designer Donna M. Stiller The views expressed are those of the individual authors and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the Board of Governors. FEDERALRESERVEBANKOFST. LOUIS REVIEW SEPTEMBER/OCTOBER, PART 2 2009 i Review is published by the Research Division of the Federal Reserve Bank of St. Louis and may be accessed through our website: research.stlouisfed.org/publications/review. 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Please contact the Research Division at the above address to request permission. © 2009, Federal Reserve Bank of St. Louis. ISSN 0014-9187 ii SEPTEMBER/OCTOBER, PART 2 2009 FEDERALRESERVEBANKOFST. LOUIS REVIEW II Milton Friedman and U.K. Economic Policy: 1938-1979 Edward Nelson Milton Friedman’s publications and commentaries became the subject of enormous publicity and scrutiny in the United Kingdom. This paper analyzes the interaction of Milton Friedman and U.K. economic policy from 1938 to 1979. The period under study is separated into four subperiods: 1938-46, 1946-59, 1959-70, and 1970-79. For each of these subperiods, the author considers Friedman’s observations on, and role in, key developments in U.K. monetary policy and in general U.K. economic policy. (JEL E31, E32, E51, E52) Federal Reserve Bank of St. Louis Review, September/October 2009, 91(5, Part 2), pp. 465-506. INTRODUCTION that he was part of the U.K. economic policy debate whether he liked it or not. The fact is that hen invited to comment on economic Friedman’s celebrity was proportionately much developments in the United Kingdom, greater in the United Kingdom than in the United W Milton Friedman frequently prefaced States. The January 1977 issue of the U.K. business his remarks with a caveat. Thus in 1964 he tes- magazine Management Today referred to the tified, “I have not followed in detail the current “present controversy, more acute in Britain than 1 circumstances of the British economy.” And anywhere else, over the teachings of Professor much later in 2005, Friedman likewise stated, Milton Friedman”; and even in 2001, long after “I have no expertise on recent British experience.” the peak of his fame, the London Independent But it was rare for him to confine his remarks to newspaper described Friedman as “one of the few this caveat. U.K. economic conditions were an economists to have become a household name” unrelenting source of interest to Friedman, a self- (Independent, August 28, 2001).3 described “life-long student of the monetary and Friedman’s emphasis on the effects of mone- economic experience” of the United Kingdom,2 tary policy, and his opposition to state interven- who, as we will see, was as early as 1943 citing tion in the economy, guaranteed that he would speeches by contemporary U.K. policymakers be classified as a marginal figure—if not ignored and drawing on U.K. economic data. outright—by U.K. academic and policy circles In time, Friedman’s influence on U.K. eco- in the early postwar period. Friedman discovered nomic discussion would become so pervasive t his for himself during spells in the United 1 From the question-and-answer portion of Friedman’s March 3, 1964, 3 testimony, in Committee on Banking and Currency (1964, p. 1144). A bibliographical appendix gives details for newspaper and periodi- cal articles cited in this paper. Sources in the appendix are arranged 2 Friedman (1980a, p. 55). chronologically. The author is indebted to Charles Goodhart, David Laidler, Alvin Marty, Anna Schwartz, and Gloria Valentine for answers to many inquiries on the subject matter of this paper. For help on specific issues, he thanks Terry Arthur, Anna Burke, Elizabeth Ennion, Robert Leeson, Mervyn Lewis, and Louise North. The author also made considerable use of the services of the Federal Reserve Bank of St. Louis Research Library in the course of obtaining material for this paper; the library staff who have helped include Adrienne Brennecke, Kathy Cosgrove, Barbara Dean, Julia Seiter, Katrina Stierholz, and Anna Xiao. Luke Shimek and Faith Weller provided research assistance. © 2009, The Federal Reserve Bank of St. Louis. The views expressed in this article are those of the author(s) and do not necessarily reflect the views of the Federal Reserve System, the Board of Governors, or the regional Federal Reserve Banks. Articles may be reprinted, reproduced, published, distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full citation are included. Abstracts, synopses, and other derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis. FEDERALRESERVEBANKOFST. LOUIS REVIEW SEPTEMBER/OCTOBER, PART 2 2009 465 Nelson Kingdom in the early 1950s. The marginal status the leading Keynesians in the United Kingdom. of Friedman and his positions persisted, with As Cobham (1984, p. 160) observes, “British short-lived exceptional periods, well into the Keynesianism has traditionally been more 1960s. But from the late 1960s and afterward, ‘extreme,’ more ‘hardline,’ than that prevalent Friedman’s positions, while still encountering for example in North America.” In particular, in resistance at the policymaking level, became the the first several postwar decades, U.K. Keynesians subject of enormous publicity and scrutiny in the were more inclined than their U.S. counterparts United Kingdom. The control of inflation was at to dismiss altogether the importance of monetary the center of U.K. political debate from 1968 to policy. The United Kingdom featured a greater 1979, dominating other policy issues during that and much longer-lasting “nonmonetary,” or period in a way that it did not in the United States, “money does not matter,” brand of Keynesianism. where Vietnam, Watergate, and superpower rela- That this viewpoint was the establishment posi- tions competed with, and frequently superseded, tion in U.K. economics until the 1980s is reflected inflation in prominence. in the names of those U.K. economists leading the Particularly over this most intense period, opposition to Friedman and monetarism. Among Friedman made interventions himself on the U.K. them were an array of knights and barons: Sir Roy scene. He provided commentary on British policy Harrod, Sir John Hicks, Sir Alec Cairncross, Lord developments during U.K. visits as well as by Kahn, Lord Kaldor, and Lord Balogh.6 long distance from the United States. Friedman’s Because Keynesianism took a more militant U.K. contributions also included some fundamen- form in the United Kingdom than in the United tal statements of his positions—most notably his States, the U.K. debates on monetary policy were lecture, “The Counter-Revolution in Monetary more fundamental, and their outcome produced a Theory” (Friedman, 1970a).