Discuss the rationale for and impact of the monetarist policies implemented by the Thatcher administration.

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Discuss the rationale for and impact of the monetarist policies implemented by the Thatcher administration

When Margaret Thatcher was elected into power in 1979 she labelled herself as a ‘conviction’ PM with her election success attributed partly to her strong character and divided opposition but mainly on her economic pledges.

In the 10 years spanning Thatcher’s leadership a variety of approaches were adopted towards the economy, some successful and some not so successful. The best way of evaluating the economic policies undertaken is to divide the era into three sections – the early Thatcher period of 1979-1982, the transitional stage of 1983-1986 and the boom and bust uncertainty of 1986-1990.

The first period of 1979 to 1982 was known by many as the ‘Monetary Experiment’ due to the beliefs of the Conservative government and its approach to economics. When Thatcher became prime minister she inherited an economy where inflation was the cause of instability. Not only were ‘shoe-leather’ and ‘menu costs’ of inflation inhibiting to business but high levels of fluctuation discouraged long term investment vital to whole economies. In 1978 inflation was 8.2 %, in 1979 it was 13.4 % and in 1980 it was 18 %  reinforcing why the government was placing emphasis on its reduction, above everything else, including unemployment. This also represented a major shift in economic thought, due to the discovery that the Philips curve was in fact only a short run trade off between unemployment and inflation. Instead, this belief was centred around the Friedman influenced expectations-augmented Philips curve in which the long run unemployment always reverts back to the ‘natural state’ and only supply side factors can shift the NRU lower. Hence there is no long run trade off between inflation and unemployment and measures to lower unemployment below the NRU will create inflationary pressures, currently experienced, and vice versa with inflation.

Following this notion the Thatcher government introduced the Medium Term Financial Strategy (MTFS) based around targets for the growth of money supply in order to curb inflation. This was to be measured using the £M3 definition (current and deposit accounts of banks + currency) and was to be observed over 4 years.

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The result of the MTFS was to push interest rates up to record levels causing wider implications yet despite this the government was still unable to achieve their desired targets for the growth of money supply, missing all of its targets during the 1980-1982/83 period by considerable amounts. It did, however, manage to reduce inflation to the manageable level of 5 % in 1983 at the expense of unemployment, which rose from around 6 % in 1979 to 12 % in 1983. However, this level of inflation should have been achieved at a much lower level of unemployment according ...

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