Monetarism and the British Government's economic policies 1979-1985

It is now generally accepted that the Thatcher administration marked a break with earlier post-war economic policy, of Keynesian aggregate demand management, to stabilise the economy and to provide full employment. The roots to this fundamental change in post-war economic policy lay with the renaissance of classical liberal economic thought, which during the late 1960's and 1970's had become fashionable and influential in Britain. A cornerstone of monetarist philosophy is the equation of exchange. Yet this identity is only useful in the long-run. For if an external shock takes place at a time of disequilibrium we are unable to ascertain how the other variables will behave, apart from the fact that the identity will hold true. Furthermore there is some doubt to whether money is exogenous, and to the constancy of the velocity of circulation. This study develops and estimates a small econometric model of the United Kingdom, and by so doing we discuss the theoretical roots of the Medium Term Financial Strategy, the errors in it's construction, and the problems of implementation. In achieving this goal, we also gain a fuller understanding of the manner an external impulse moves through the equation of exchange identity, and the lag structures involved.