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Extents and Limits of Monetary Reform under Gordon Brown

Nathalie Champroux
p. 59-76

Résumé

Gordon Brown’s first and main policy when nominated Chancellor in 1997 was to reform the monetary framework. This consisted of three major changes dedicated to maintaining price stability. From 1997 to 2007, the new framework seemed efficient, with Britain keeping moderate but constant growth and limited inflation. But the financial and economic crisis which started in 2008 changed the rules. Taking account of the two-year time lag, the expansionist interest rate policy applied since December 2007 first managed to prevent disinflation, but then led to accelerating increase in prices. Moreover, between the second quarter of 2008 and the third quarter of 2009, Britain’s growth rate remained negative, even despite the huge quantitative easing measures which took over from conventional interest rate policy. This paper will first analyse the monetary framework reform. It will then question its value, knowing that it obviously failed to prevent the crisis and to rapidly cure the recessionary situation.

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Introduction

1Gordon Brown’s first and main policy, when nominated Chancellor in 1997, was to reform the monetary framework by enforcing three major changes dedicated to maintaining price stability. He replaced the inflation target margin by a symmetrical inflation target rate that would correspond to a bearable equilibrium rate supporting growth. He created a Monetary Policy Committee at the Bank of England; he granted it complete independence in deciding and implementing any measure needed to reach the government’s target. He reinforced forward looking, asking the Committee to forecast inflation rates and to take corrective measures now, so that the rates would match the target in the future.

2From 1997 to 2007, the new framework seemed efficient. Britain kept a cruising speed of moderate but constant growth and limited inflation. But the financial and economic crisis which started in 2008 changed the rules. Taking account of the two-year time lag, the expansionist interest rate policy applied since December 2007, and reinforced from October 2008, indeed managed to prevent disinflation. But it also led to an acceleration in the rhythm of price increase. At the same time, economic growth vanished. Between the second quarter of 2008 and the third quarter of 2009, Britain’s growth rate remained negative, even in spite of the huge quantitative easing measures which took over from conventional interest rate policy. Since then, the growth rate, even if mostly positive, has remained tiny.

3This paper will first analyse Gordon Brown’s monetary reform. It will then question the value of the stability framework which obviously failed to prevent the crisis. It will also try to determine why the British monetary policy has not managed to rapidly cure the situation.

An Overview of the Monetary Reform

4Monetary policy is dedicated to stabilizing “money” in terms of inflation or exchange rates. It is recognized as a major tool of macroeconomic policy. It is very often linked to budget policy, that is to say the way public finance is funded and spent, since the two policies contribute to macroeconomic stability. Nevertheless, this article will focus on monetary policy only. It will not consider financial policy either, which deals with the regulation, or deregulation, of the financial system, and which was at the root of the 2008 crisis.

  • 1  Champroux, N., 2009 (b).

5Since the Sterling pound withdrawal from the Exchange Rate Mechanism (ERM) of the European Monetary System in September 19921, Britain’s monetary policy concentrated on price stabilization through the manipulation of interest rates. In 1997, newly appointed Chancellor of the Exchequer Gordon Brown reformed the monetary framework to strengthen this policy. The following paragraphs describe the three main features of the reform, recall the targeted aims and analyse the outcome and innovative aspects of the reform.

Elements of the Monetary Reform

  • 2  Brown, G., 1997 (a), 1997 (b), 1997 (c).

6As soon as 6th May 1997, Gordon Brown started announcing the various features of his new monetary framework2.

  • 3  Brown, G., 2003.

7He first replaced the inflation target margin by an inflation target rate. The target previously set by the Conservative government had been a margin of 0-2.5% for the Retail Price Index excluding mortgage interest payments (RPIX). Gordon Brown kept the reference index, but fixed the target at a symmetrical 2.5%. He also decided that the value of the target would be confirmed, or modified, at least once a year through a letter by the Chancellor to the Governor of the Bank of England (BoE). In December 2003, in order to facilitate comparisons with the euro-area measures of inflation, Gordon Brown adopted the Consumer Price Index (CPI) as the measure reference and accordingly diminished the target to a corresponding value of 2%3.

8Gordon Brown also created a Monetary Policy Committee (MPC) at the BoE. The MPC is composed of nine members. Five are senior executives from the BoE and are appointed for five years, after which they may be either reappointed or replaced. Four are independent experts appointed for three years. There also is one Treasury representative who liaises with the ministry. The MPC gathers each month to examine the national and global economic and monetary situations and to implement any measure needed to reach the government’s inflation target. It has entire operational independence in setting interest rates, but it must respect a high degree of transparency, through the publication of the minutes of its meetings, and is accountable to the government if the inflation rate drifts away from the target by ±1 percentage point.

9Last but by no means least, Gordon Brown reinforced forward looking. The interest rate modifications do not aim at correcting the current inflation rate in the short run. Rather, considering the time lag between interest rate changes and their effect on inflation, that the BoE estimates is two-years long, the MPC has to forecast inflation and manipulate present interest rates to obtain that future inflation rates would match the target.

The Aims of the Monetary Reform

  • 4  Bank of England Act, 1998.
  • 5  Brown, G., 2010, p. 223.

10In a nutshell, the general aim of the reform was to raise the effectiveness of monetary policy. It was to help it to reach its objectives formally defined as “(a) to maintain price stability, and (b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment”4. Gordon Brown established price stability as the keystone of his supply-side policy. A stable price environment would ease trade and business decision-making, thus creating wealth and hence, demand. Gordon Brown also says that it allowed the government “to focus on the investments in education, IT, science, and infrastructure”, necessary for “improvements in the productivity of the economy5.

  • 6  Champroux, N., 2009 (b).

11One important aspect of the reform simply was the restoration of the credibility of monetary policy. This credibility had been deeply altered by the Conservative governments’ hesitations between exchange rate and inflation targeting policies from 19836. Monetary policy needed to be believed in, so that it would be effective.

12The reform also depoliticized monetary policy. By giving operational independence to the BoE, it made sure that the government would no longer be able to manipulate interest rates for purely political reasons, like approaching government party congress or General Elections. The stress put on forward looking also ensured a long term perspective. The UK would consequently finish with short-term stop-and-go policies leading to the infernal cycle of booms and busts.

13Last, the choice of the inflation target rate, instead of the inflation target margin, reduced the risk of inadequately restrictive policy. The BoE would not be tempted to unnecessarily curb inflation to the bottom of the margin as a precaution measure. The UK would experience a 2.5% inflation rate in the long run, but this rate was seen as a sort of steady-growth rate of inflation, just as there used to be a NAIRU.

Outcomes versus Innovations

14Naturally, Gordon Brown’s construction of a new monetary framework did not come out of the blue. It found its origins in progressive theoretical thinking and recent partial implementation.

  • 7  Champroux, N., 2009 (a).

15Price stability had long been a priority. Successive governments had tried to maintain it through price and income control policies in the 1970s, monetarist measures at the beginning of the 1980s, mixed policies in the second half of the 1980s and the exchange rate policy of Sterling participation in the ERM from 1990 to 1992. Since 1993, the Conservative governments had set up the basis of inflation targeting, following a spreading English-speaking world trend7.

  • 8  Conservative Party, 1977, p. 9.
  • 9  Lawson, N., 1989, p. 1059-1060.
  • 10  Lamont, N., 1993.

16The independence of the BoE, for its part, had been advised by the Conservatives as far as 1977 in their Right Approach to the Economy8, and again by Chancellors Nigel Lawson in 19889 and Norman Lamont in 199310. One must also keep in mind that central banks’ independence has been a euro-area admission criterion since the European Monetary Union (EMU) inception.

17Nevertheless, it would be unfair not to recognize Gordon Brown’s real innovations. First, although praised at length, the BoE’s independence still had to come true. Gordon Brown was the Chancellor who, after having meticulously prepared it for two years with Ed Balls, took everyone by surprise when he actually enforced it. Second, there was the symmetrical target rate setting, whereas the European Central Bank (ECB) has stuck to the target margin concept. Last, formally establishing a new monetary framework in which low inflation was confirmed as the priority, and interest rates as the main policy tool, meant a de-facto renouncement to integrating the EMU. Indeed, since interest rate changes were dedicated to inflation target reaching in the medium term, they were impossible to use to stabilise the Sterling pound at the same time, with an eye to its fixing and replacement by the euro.

An Empirical Monetary Policy Assessment

18The aim of the new monetary framework was to maintain price stability, as defined as a 2.5% RPIX growth rate, and later a 2% CPI growth rate, in order to create satisfying growth, as usually measured by Gross Domestic Product (GDP) growth. Assessing the efficiency of the framework therefore needs studying the corresponding recorded statistics. The following paragraphs will examine inflation and growth rates, showing that the framework actually did well until the financial crisis burst.

Inflation and Growth before the Crisis

19The performances of the two fundamentals can be assessed on their own, through time or compared to other countries’ performances. Table 1 below presents comparative figures of the European Harmonised Consumer Price Index (HCPI) – the equivalent of the British CPI – from Gordon Brown’s nomination as Chancellor.

Table 1: Selected Annual Inflation Rates (HCPI) (1997- 2008)

Country

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

UK

1.8

1.6 

1.3 

0.8 

1.2 

1.3 

1.4 

1.3 

2.1 

2.3

2.3

3.6

EU (27)

1.3 

1.2 

1.9 

2.2 

2.1 

2.0 

2.0 

2.2 

2.2 

2.3

3.7

EA

1.6

1.1 

1.1 

2.2 

2.4 

2.3 

2.1 

2.1 

2.2 

2.2 

2.1

3.3

France

1.3

0.7 

0.6 

1.8 

1.8 

1.9 

2.2 

2.3 

1.9 

1.9 

1.6

3.2

Germany

1.5

0.6 

0.6 

1.4 

1.9 

1.4 

1.0 

1.8 

1.9 

1.8 

2.3

2.8

Source : The author, from Eurostat statistics available at http://epp.eurostat.ec.europa.eu/​tgm/​table.do?tab=table&init=1&language=fr&pcode=tsieb060&plugin=1, retrieved in November 2010.

  • 11  Esposito, M-C. et al., 2007, p. 35-37.

20The figures reveal that, on the whole, from 1997 to 2007, the British annual rate of inflation kept close to the Treasury target. The exception on the period was 2000, with the concurrence of the effects of the corrective interest rate increases of 1997-1998 and those of the international financial disequilibrium of autumn 199811. Then, in 2008, the British CPI growth rate did exceed the target by more than one percentage point. Yet, none of the countries, or zone, which was implementing inflation targeting, could actually respect its inflation objectives at that time.

21The UK’s long term RPIX percentage change can also be useful to consider (see figure 1 below). It shows more stability at lower inflation rates with New Labour than with the Conservatives, even if one must admit that the virtuous trend had already started in 1993.

Figure 1: UK RPIX Percentage Change (q/q-12) (1979-2009)

Figure 1: UK RPIX Percentage Change (q/q-12) (1979-2009)

Source: The author, from the UK government statistics available at http://www.statistics.gov.uk/​STATBASE/​tsdataset.asp?vlnk=7173&More=Y, retrieved in November 2010.

  • 12  Brown, G., 2010, p. 76.

22On the whole, as Gordon Brown underlines, “in the 1970s British price inflation had averaged 15 percent; in the 1980s, 12 percent; and in the 1990s, 6 percent. But during the time [he] was Chancellor of the Exchequer, it was 3 percent”12.

23As far as growth is concerned, the UK recorded good performances until 2007. Annual real GDP growth rates always exceeded 2% for the period. Yet, comparable European countries, and especially Germany, did better from 2006. On the other hand, GDP per capita in purchasing power standards remained significantly higher in the UK than in comparable European countries (see tables 2 and 3).

Table 2: Selected Annual Real GDP Growth Rates (1997-2008)

Country

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

UK

3.3

3.6

3.5

3.9

2.5

2.1

2.8

3.0

2.2

2.8

2.7

-0.1

EU (15)

2.7

3.0

3.1

3.9

1.9

1.2

1.2

2.3

1.8

3.0

2.8

0.3

EA

2.6

2.8

2.9

3.9

1.9

0.9

0.8

2.2

1.7

3.0

2.8

0.4

France

2.2

3.5

3.3

3.9

1.9

1.0

1.1

2.5

1.9

2.2

2.4

0.2

Germany

1.8

2.0

2.0

3.2

1.2

0.0

-0.2

1.2

0.8

3.4

2.7

1.0

Volumes, year to year percentage

Source: http://www.statistics.gov.uk/​STATBASE/​tsdataset.asp?vlnk=7173&More=Y, retrieved in November 2010.

Table 3: Selected Annual GDPs per Capita in PPS (1997-2008)

Country

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

UK

118

118

118

119

120

120

122

124

122

120

117

116

EU (15)

115

115

115

115

115

114

114

113

113

112

112

111

EA

114

114

114

114

113

112

111

110

110

110

110

109

France

115

115

115

115

116

116

112

110

111

109

108

108

Germany

124

122

122

118

117

115

116

116

117

116

116

115

EU 27 = 100

Source: http://epp.eurostat.ec.europa.eu/​tgm/​table.do?tab=table&init=1&language=fr&pcode=tsieb010&plugin=1, retrieved in November 2010.

24Last, if a graph were drawn with GDP quarter-to-quarter change rates, from 1979 to 2009, it would prove better stability with New Labour governments than with Conservative governments, even if this stability was performed at a lower growth rate (more between 0-1% than around 1% as with the Conservatives) and dated back to 1993.

25These observations may lead to three conclusions. First, the objectives officially set by Gordon Brown for monetary policy in 1997 were indeed reached until the 2008 crisis. The UK experienced what used to be called NICE (Non-Inflationary Consistently Expansionary) years. Second, the better performances of the UK, as regards those of its euro-area comparable partners, suggest the two monetary frameworks did not present the same degree of effectiveness. This comes as no surprise, since the ECB’s policies have been losing efficiency by trying to adapt to all countries’ situations and failing to match most. Third, since price and growth stability dated back to 1993, the phenomenon seemed to be the result of inflation targeting as a whole, and not especially that of Gordon Brown’s new monetary framework.

Figure 2: Selected HCPI Percentage Changes (m/m-12) (April 2009-April 2011)

Figure 2: Selected HCPI Percentage Changes (m/m-12) (April 2009-April 2011)

Source: The author from Eurostat statistics available at http://epp.eurostat.ec.europa.eu/​tgm/​refreshTableAction.do;jsessionid=9ea7971b30e7fe72870d5c374b838aba9f1279b99cb8.e34RaNaLaN0Mc40LcheTaxiLbN8Oe0?tab=table&plugin=1&pcode=teicp000&language=fr, retrieved in May 2011.

  • 13  New York Stock Exchange figures. The oil price surge is thought to have been exacerbated by the Un (...)

26The MPC reckoned the surge was alarming, but was not the result of a faulty monetary policy that might have been implemented two years or so before. Rather, the explanation was a sharp rise in energy prices, and hence in commodity prices. Indeed, from 19th January 2007 to 11th July 2008, the price of crude oil nearly tripled, from 51.99 to 145.08 dollars13.

27A comparison with European partners’ figures (see figure 2 above) shows that, since it had previously maintained higher inflation rates than its euro-area partners, the UK managed to avoid disinflation in 2009. The country then experienced a sharper acceleration of inflation from September 2009 to January 2010, which increased the inflation rate differentials. It would be half-wrong to think that this acceleration was the result of the easing of monetary policy implemented to boost the supply of money and credit when the financial crisis burst. It is true that the easing immediately exacerbated Sterling depreciation, which put an upward pressure on inflation. Yet, the MPC embarked on the easing on 8th October 2008 (see figure 4) and the time lag, even reduced to its minimums, implies significant effects on output would occur from October 2009 and consumer prices would only be affected from April 2010, and not sooner. Unexpectedly, from April to September 2010, inflation in the UK decelerated and then stabilised, which diminished the inflation rate differentials. But since October 2010, prices have increased at a higher rate in the UK than in its partner countries.

  • 14  Osborne, G., 2011.

28On the whole, the British inflation rate has remained superior to its CPI target value by more than one percentage point since December 2009, and then even by more than 2 percentage points since January 2011. Despite these growing gaps, second Labour Chancellor Alistair Darling, and then new Conservative Chancellor George Osborne have repeatedly re-confirmed Gordon Brown’s 2% CPI growth rate target, pretending keeping firm so as not to alter confidence. Yet, observers cannot but notice a certain relaxation of governmental requirements concerning inflation. Indeed, on 23rd March 2011, George Osborne acknowledged BoE Governor Mervyn King’s view that “as several temporary factors [waned], inflation [would] fall back so that it [was] about as likely to be above the target as below it two to three years ahead”14. In doing so, he clearly accepted that inflation would keep steady in the long run, whereas the expected “price stability first” strategy would have implied an increase in interest rates that might have curbed inflation by autumn 2012. It therefore seems the crisis has shifted monetary policy objectives towards (a) supporting the economic policy of Her Majesty’s Government, including its objectives for growth and employment, and (b) subject to that, maintaining price stability.

29Indeed, growth objectives have been far from reached since the second quarter of 2008, as shown in figure 3 below. Even the sharp depreciation in Sterling’s effective value, due to the MPC’s cuts in interest rates and the loss in the UK’s economy confidence, has not boosted growth through exports. Reverse expectations would have been preposterous in those times of global recession when the UK’s partners have not been prosperous either. Yet, supplementary worries arose when the UK economy failed to follow France’s and Germany’s recoveries in the second and third quarters of 2009. Since then, the British economy seems to have taken off again, but very weakly and behind its partners’. In the fourth quarter of 2010, it even fell back to a negative growth rate.

Figure 3: Selected GDP Percentage Changes (q/q-1) (Q1 2008-Q1 2011)

Figure 3: Selected GDP Percentage Changes (q/q-1) (Q1 2008-Q1 2011)

Source: The author from Eurostat statistics available at http://epp.eurostat.ec.europa.eu/​tgm/​table.do?tab=table&init=1&language=fr&pcode=teina011&plugin=1, retrieved in May 2011.

Questioning the Value of the New Monetary Framework

30At least two main questions about the value of past and present monetary policies have arisen with the occurrence of the crisis. The first question concerns the responsibility of the MPC’s monetary policy in creating the crisis. The second question is about whether the British monetary authorities reacted properly when the crisis occurred. Debates are still in progress, but here are some elements that sound sensible.

The MPC’s Monetary Policy Responsibility for Creating the Crisis

31The 2008 crisis was that of credit. Credit had increased considerably in the preceding years: borrowers and lenders had relied on the growing housing prices to refinance their loans and more sub-prime lending had been granted. In the UK, household debt had thus reached more than 150% of annual income. At the same time, financial institutions had multiplied new opaque financial instruments through securitizations. Then suddenly the housing price bubble burst and caused insolvency, while financial institutions were discovered to have created empty shells. Those who still had some liquidity kept it in doubt of their counterparties’ solvency and the credit system crunched.

32Accusations then multiplied against central banks for having maintained interest rates at too low a level and for too long a time after 11th September 2001. This was said to have provided households and businesses with easy access to cheap finance on the one hand, and encouraged financial investors to take more risk in order to find higher remuneration on the other hand.

  • 15  Bernanke, B., 2010.
  • 16  Tucker, P., 2010.

33Debates still go on about this issue. Ben Bernanke, Chairman of the United-States Fed, doubts that “monetary policy contributed significantly to the bubble in housing prices”15. But Paul Tucker, Deputy Governor of the BoE, confirms that “Any easing in monetary policy inevitably pushes up asset prices (compared with the counterfactual) because it reduces the discount rate used to value the cash flows from securities and the rental income on property”, which inflated the bubble16.

34Even if central banks’ responsibility were proved to be true, then the MPC would be less guilty than its counterparts. Indeed, as can be seen in table 4 below, on annual basis, the BoE maintained higher interest rates than the Fed or the ECB, with the small exceptions of 2000 and 2006.

Table 4: Selected Bank Base Rates (1997-2008)

97

98

99

00

01

02

03

04

05

06

07

08

UK

6.54

7.23

5.34

5.96

5.12

4.00

3.69

4.38

4.65

4.64

5.51

4.67

US

5.48

5.38

5.13

6.29

3.68

1.67

1.11

1.40

3.23

5.01

4.98

2.11

EA

2.71

4.02

4.29

3.21

2.26

2.00

2.02

2.76

3.84

3.90

Source: The author, from bank base rate figures provided by the BoE, the Fed and the ECB.

Figure 4: Selected Central Bank Base Rates (1997-2009)

Figure 4: Selected Central Bank Base Rates (1997-2009)

Source: The author, from base rate figures provided by the ECB and the BoE.

The MPC’s Crisis-corrective Monetary Policy

35If comparison is limited to the European counterpart, as in figure 4 above, one can observe that indeed the UK monetary authorities always ensured higher interest rates until the crisis occurred. Moreover, they started raising base rates far before the ECB did, as soon as the beginning of November 2003.

36Further doubts about the value of the new British monetary framework arose when the UK recorded weaker performances than its euro-area partners in the core of the crisis. Yet, the following paragraphs will show the MPC’s reactions to the credit crunch and the subsequent recession made sense.

From Conventional Measures…

37As far as conventional measures are concerned, the MPC could not really do more than it did. As figure 4 above shows, it actually cut interest rates a week in advance of the ECB in October 2008 (even if the cut was part of a concerted action agreement between the US, the UK, the euro zone, Japan and Switzerland) and pushed monetary easing further until the interest rates were down to 0.5% in March 2009. The Fed, for its part, reduced its funds rate from 2% when the crisis occurred to 1% in October 2008 and 0.25% in December 2008.

38The MPC’s decisions, of course, were aimed neither at immediately reducing the existing rates of inflation nor at immediately boosting output. Rather, they first meant to prevent inflation from slumping below the target in the medium term, as forecasts then predicted. Yet, they were also advantageously likely to ease the burden borne by households and businesses who had contracted floating-rate debt. Since then, the MPC has foreseen limited risk of accelerating inflation in the future, as unemployment would contain wage claims, but increased risk of impairment of the productive potential. Hence the keeping of interest rates at 0.5 %, with the authorities’ notion of “limited risk of accelerating inflation” having obviously been understood as a 4% CPI growth rate.

  • 17  Taylor, J. B., 2008.

39The comparison between the MPC, the ECB and the Fed’s reaction in terms of conventional monetary policy suggests there was no other sensible solution than rapid cuts in interest rates. In this matter, the MPC cannot been accused of not having gone far enough. Yet, on the contrary, it might, just like the Fed, be said to have gone too far17, unnecessarily trapping itself in the impossibility of cutting interest rates further.

… To Non-Conventional Measures

40Once they could not reduce interest rates anymore, because nominal rates cannot be negative, central banks had recourse to non-conventional measures like credit easing and quantitative easing, the latter consisting in injecting money in the economy by purchasing bonds and assets.

41The ECB concentrated on credit easing. But it also held a small programme of 60 billion euro covered bond purchase and it massively undertook long term repos. The Fed spent huge amounts in quantitative easing. By March 2010, it had purchased 1.25 trillion dollars of agency mortgage-backed securities (MBS); 200 billion dollars of debts of government-sponsored enterprises (GSEs); and 300 billion dollars of longer-term Treasury securities18. In November 2010, it announced a supplementary programme of a Treasury bond 600 billion dollar purchase. The BoE opted for quantitative easing too, through the purchase of government bonds and high-quality private sector assets. In March 2009, the MPC decided of a buying amount of 75 billion pounds. This amount was subsequently increased during the year to reach a total of 200 billion pounds.

  • 19  Miles, D., 2010.
  • 20  Tucker, P., 2010.
  • 21  Miles, D., 2010.

42As Professor David Miles, member of the MPC, explains, there may be numerous short term as well as long-term effects of British quantitative easing, the speed and extent of which are difficult to evaluate19. What most commentators agree on is that the policy has provided the banking system with the liquidity it was short of. Yet, uncertainty has grown about whether the money has actually gone where it should, even if Paul Tucker is confident wholesale money markets have “distribu[ted] that assistance to where it is needed”20. Looking at the potency of the crisis in the UK, there is strong argument for saying that quantitative easing was not avoidable. To critics arguing that it has not worked so well, David Miles answers that its absence of implementation would certainly have had even worse consequences21.

  • 22  Tucker, P., 2010.

43According to the preceding elements, Gordon Brown’s monetary framework does not seem to be at fault. In terms of credit crisis causing, the MPC’s policies seem less responsible than the Fed’s or the ECB’s. In terms of crisis curing, nothing more could be done as far as conventional measures were concerned, and then non-conventional measures have been applied. Although British quantitative easing sounds relatively small compared to the United-States’, it nevertheless represented no less than 14% of British GDP. What also accredits the value of Gordon Brown’s monetary framework is that first, the UK’s partners have presented no alternative and second, the new British Conservative government, in power since May 2010, has officially adopted it as its own, even if it seems it has inverted the objectives for the time being. Experts do not advise suppression of the framework, but improvements, like the development of “macro-prudential instruments”22.

  • 23  We would like to add over-confidence from economic agents and financial institutions which might h (...)

44So if Gordon Brown’s monetary framework is not at fault, the causes of the credit crisis and the deep recession that followed must be found elsewhere. Massive research has already evidenced financial deregulation; expansionary budget policies and the accumulation of debt; restricted social policies not providing enough automatic stabilizers; and insufficient industrial policies23.

  • 24  Brown, G., 2010, p. 75.

45This list forcibly indicates that monetary policy does not do all. But this does not clear Gordon Brown from his responsibility. Firstly, most of the causes of the current return to stagflation, which have just been listed above, concern fields that Chancellor Gordon Brown and his team were in charge of between 1997 and 2007. Secondly, as Prime Minister, Gordon Brown failed at preventing the UK from falling into what is now well known as the liquidity trap. Despite the sharp cuts in interest rates and the expensive quantitative easing plan, to quote Gordon Brown’s reference to the description of the trap researcher Richard Koo offered, “credit [has stopped] growing, not because banks do not want to lend, but because companies and households do not want to borrow”24. But then Gordon Brown had long been fully aware of the risk, because if he is to be believed, he was left a deep impression on by the liquidity trap which affected Japan in the 1990s.

Conclusion

46This paper has described Gordon Brown’s monetary framework and questioned its value. It has first shown that the objectives Gordon Brown formally set for monetary policy were actually met until the 2008 financial crisis burst. It has also reached the conclusion that the MPC has been as efficient as its field of activity has allowed. First, the committee seems less responsible for the occurrence of the financial crisis than its counterparts. Then, when confronted to the crisis, the MPC did not spare its means, cutting interest rates to the minimum and performing considerable quantitative easing.

47At first glance, Gordon Brown’s monetary framework therefore does not seem at fault. The responsibility for the financial crisis and its economic outcomes rather lies in the other-than-monetary policies Gordon Brown implemented in the fields of financial regulation and budget management on the one hand, and in the development of the liquidity trap phenomenon on the other hand. Yet, one cannot but remark that in the current particular circumstances, Gordon Brown’s monetary framework initial objectives had to be adapted from price stability for growth to moderate inflation for growth. When this crisis-time strategy finally bears its fruits remains to be seen.

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Notes

1  Champroux, N., 2009 (b).

2  Brown, G., 1997 (a), 1997 (b), 1997 (c).

3  Brown, G., 2003.

4  Bank of England Act, 1998.

5  Brown, G., 2010, p. 223.

6  Champroux, N., 2009 (b).

7  Champroux, N., 2009 (a).

8  Conservative Party, 1977, p. 9.

9  Lawson, N., 1989, p. 1059-1060.

10  Lamont, N., 1993.

11  Esposito, M-C. et al., 2007, p. 35-37.

12  Brown, G., 2010, p. 76.

13  New York Stock Exchange figures. The oil price surge is thought to have been exacerbated by the United-States Fed’s interest rate cuts. See Taylor, J. B., 2008.

14  Osborne, G., 2011.

15  Bernanke, B., 2010.

16  Tucker, P., 2010.

17  Taylor, J. B., 2008.

18 http://www.calculatedriskblog.com/2010/10/qe1-timeline.html, retrieved in November 2010.

19  Miles, D., 2010.

20  Tucker, P., 2010.

21  Miles, D., 2010.

22  Tucker, P., 2010.

23  We would like to add over-confidence from economic agents and financial institutions which might have taken less risk had they not so heavily relied on the BoE’s heroic reputation as the crisis-solving lender of last resort.

24  Brown, G., 2010, p. 75.

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Table des illustrations

Titre Figure 1: UK RPIX Percentage Change (q/q-12) (1979-2009)
Crédits Source: The author, from the UK government statistics available at http://www.statistics.gov.uk/​STATBASE/​tsdataset.asp?vlnk=7173&More=Y, retrieved in November 2010.
URL http://osb.revues.org/docannexe/image/1124/img-1.jpg
Fichier image/jpeg, 76k
Titre Figure 2: Selected HCPI Percentage Changes (m/m-12) (April 2009-April 2011)
Crédits Source: The author from Eurostat statistics available at http://epp.eurostat.ec.europa.eu/​tgm/​refreshTableAction.do;jsessionid=9ea7971b30e7fe72870d5c374b838aba9f1279b99cb8.e34RaNaLaN0Mc40LcheTaxiLbN8Oe0?tab=table&plugin=1&pcode=teicp000&language=fr, retrieved in May 2011.
URL http://osb.revues.org/docannexe/image/1124/img-2.jpg
Fichier image/jpeg, 132k
Titre Figure 3: Selected GDP Percentage Changes (q/q-1) (Q1 2008-Q1 2011)
Crédits Source: The author from Eurostat statistics available at http://epp.eurostat.ec.europa.eu/​tgm/​table.do?tab=table&init=1&language=fr&pcode=teina011&plugin=1, retrieved in May 2011.
URL http://osb.revues.org/docannexe/image/1124/img-3.jpg
Fichier image/jpeg, 160k
Titre Figure 4: Selected Central Bank Base Rates (1997-2009)
Crédits Source: The author, from base rate figures provided by the ECB and the BoE.
URL http://osb.revues.org/docannexe/image/1124/img-4.jpg
Fichier image/jpeg, 149k
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Pour citer cet article

Référence papier

Nathalie Champroux, « Extents and Limits of Monetary Reform under Gordon Brown », Observatoire de la société britannique, 10 | 2011, 59-76.

Référence électronique

Nathalie Champroux, « Extents and Limits of Monetary Reform under Gordon Brown », Observatoire de la société britannique [En ligne], 10 | 2011, mis en ligne le 23 février 2012, consulté le 26 novembre 2014. URL : http://osb.revues.org/1124 ; DOI : 10.4000/osb.1124

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Auteur

Nathalie Champroux

Maître de Conférences à l'Université Paris Est Créteil

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Observatoire de la société britannique

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