Blog
Stephen King on connections between monetary and fiscal policy
7th April 2010
Monetary and fiscal policy may be two separate topics in the published AS and A2 economic syllabus but any smart student knows that there are many connections between the two.
The recently introduced policy of quantitative easing with the Bank of England effectively acting as buyer of first resort for new issues of government bonds suggests that monetary and fiscal policy have been joined at the hip! And, as Stephen King makes clear in a super article in the Independent, the decisions that politicians do (or do not) make in the aftermath of the election could prove to be pivotal for the next move of sterling in the currency markets.
There is an underlying nervousness among international investors about the credibility of plans to cut the fiscal deficit and how strongly the UK is committed to deficit reduction without resorting to benign neglect / depreciation of sterling and a faster rise in the general price level.
“Monetary stability is ultimately grounded in fiscal stability. If, after the general election, it simply proves impossible to deliver the necessary budgetary cuts, what then happens? Does sterling collapse? Does the new government raise the inflation target? Will the printing presses be turned back on? Will Britain see its credit rating downgraded, thereby increasing the cost of international borrowing? I don’t have the answer, but I know it’s time to dust off the history books.”
The Stephen King article has a great section on the background to Britain’s return to the Gold Standard in the early/mid 1920s. Students of this time period will draw much from this really clear explanation.
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.