January's issue of Cardiff University News

IN THE SPOTLIGHT
Shaping British
macroeconomic policy
One of the most influential and widely recognised economists,
Cardiff Business School’s Professor Patrick Minford gained
public prominence during the 1980s for his support for the
Conservative Government’s economic policies.
Professor Patrick Minford
His economic modelling research
and that of Cardiff Business School’s
Julian Hodge Institute of Applied
Macroeconomics (JHIAM), helped
prompt a fundamental shift in UK
economic policy.
“British economic policy is concerned
with issues such as the unemployment
rate, the inflation rate and the rate
of economic growth,“ according
to Professor Minford. “Following
the global economic crisis of 2007,
there has been a renewed focus on
how the UK government’s fiscal,
monetary and other policies impact on
macroeconomic conditions,” he adds.
For Professor Minford, and his
colleagues, it is this focus which has
led them to develop their economic
modelling efforts to create an evidencebase
to inform economic policy in this
post-crisis era.
“Through the Institute’s research
we have shown that creating models
of the economy, which treat people
as reacting intelligently to their
environment, (‘rational expectations’)
fit the economy’s actual behaviour
rather well.
“As a consequence, we have been able
to develop new methods of estimating
and evaluating models and apply them
to macroeconomic policy issues in
areas including monetary and fiscal
policy, exchange rate policy and the
supply side policies covering policy on
employment and growth,” Professor
Minford adds. As a result, Professor
Minford and his team have been able
to apply their findings to key areas of
economic policy.
Most notably, their modelling has
advocated that the Pound should be
allowed to float to allow monetary
policy to be carried out in an
independent way whilst maintaining
that attempts to fix exchange rates are
damaging; to promote employment and
growth the labour and related markets
should be liberalised; and perhaps -
most notably - that entry to the Euro
would be extremely damaging for the
British economy.
“Using rational expectations models
of the economy, we have been able
to establish and set out a ‘classical’
framework for UK macroeconomic
policy,” according to Professor
Minford.
In recent years the debate on how to
stimulate the economy has once again
resurfaced – thanks in large part, to the
UK’s relationship with the EU, and
more crucially how the UK reacts to
a large budget deficit produced by the
banking crisis, monetary policy and
the issue of how much money we, as a
nation, should print.
“The macroeconomic policy issues
that dominate today are the need to
reduce the budget deficit, the crisis
in the euro-zone, monetary policy
and the inflation target, and growth
and employment – the supply-side, ”
according to Professor Minford. In all
of these areas, their research has made
a significant contribution to and impact
on economic policy. One example is
their insistence on fiscal planning. The
UK Coalition Government and the
current Chancellor have consistently
said they are determined to restore
the public finances, regardless of
Keynesian arguments.
The same is also true of their model
for growth, which shows that
growth is driven by productivity, not
demand, prompting the UK Coalition
Government to increasingly turn to
ways of increasing competition and
efficiency – especially in the public
sector.
More widely though has been their
contribution towards UK economic
thinking through the establishment
of The Shadow Monetary Policy
Committee (SMPC).
Co-founded by Professor Minford,
the SMPC is a group of independent
economists (including many Cardiff
academics including its current
secretary, Professor Kent Matthews)
drawn from academia, the City and
elsewhere, which meet at the Institute
of Economic Affairs, to discuss the
state of the international and British
economies.
The SMPC’s monthly analysis is
widely cited in the media and followed
by the Bank of England’s Monetary
Policy Committee.
The same is also true for the
contribution to the work of the Institute
of Economic Affairs (IEA).
Described by BBC journalist, writer
and commentator, Andrew Marr as
“undoubtedly the most influential think
tank in modern British history” the
IEA has published and popularized
the macroeconomic ideas formulated
by Professor Minford and his JHIAM
colleagues.
It would seem that Professor Minford’s
influence is unlikely to go away. With
major issues like the UK’s relationship
to the EU and the Euro likely to
resurface and, more significantly, the
continued need for ideas to stimulate
economic growth.
“Recently I argued on Radio 4’s
Stephanomics for prioritising growth
policies, especially towards the banks
to get credit growth going again and
in evidence to the Commons Foreign
Affairs Committee I argued for a new
approach to the EU on economic
grounds,” said Professor Minford.
And what for the UK’s economic
future? Unlike some, Professor Minford
is more optimistic than many.
He forecasts that whereas there has
been no growth for 12 months, it will
return slowly - with an easing of credit
this year the UK government he argues
will do more to encourage banks to lend
to small businesses.
As for the end of the UK’s financial
crisis?
“I remember a businessman in the heart
of the crisis in 2008 saying, ‘if only I
could see the bottom’. I think what I’d
say to people today is you probably
have seen the bottom,” he adds.
6