BRITISH INFLATION AND UNEMPLOYMENT IN THE 1970S - A MODEL-BASED DECOMPOSITION

The UKs stagflation in the 1970s is decomposed into its causative fact ors, using the Liverpool rational expectations model. It is found that there was a large rise in the natural rate of unemployment, mainly du e to rising union density; that fiscal and monetary shocks had little effect on the resulting rise in unemployment; and the high inflation o f the period was due to persistent and large fiscal deficits, with the ir accompanying monetization. Mrs Thatcher inherited an inflation indu ced by an ongoing deficit and a natural rate of over 2 million unemplo yed.