And output has risen in every single quarter since the middle of 1992, something that is true of no other G7 economy. Why were the 1990s so successful? And can that success continue? Four features of our economy lie behind this improved performance. First, the new monetary framework - based on an explicit target for inflation, a high degree of transparency, and, since 1997, independence of the Bank of England made it clear to everyone that monetary policy was, and would continue to be, targeted on maintaining low and stable inflation. Second, a substantial fiscal consolidation turned a deficit of 8% of GDP in 1993 into a sustainable position for the public finances based on a set of clear rules for government debt. Third, a continuing programme of supply-side reforms, over a period of 20 years, made it possible to reduce unemployment without generating higher inflation. Fourth, although the unexpected twists and turns of the world economy did pose real challenges to monetary policy, especially in the latter half of the decade, those shocks tended to average out over time rather than cumulate in either an upward or downward spiral. In other words, the economic surprises alternated between good one year and bad the next, rather than adding up to “one damn thing after another”. In that sense, Lady Luck smiled on us. Of course, we were not alone in enjoying the 1990s.
As the financial system changes shape, it seems plausible to think that further change could be necessary. If so, that change would benefit from further research on the costs and benefits of the extended regulatory and central bank safety net. (f) The Macroprudential Policy Framework: As a still-fledgling framework, there are a wide range of questions still surrounding the macroprudential framework. There is no settled, practical approach to defining the breadth of objectives of a macroprudential regime. Should the potential for aggregate demand externalities associated with a debt overhang in the household sector, for instance, fall under the purview of a macroprudential authority? Nor, in the main, is there any settled approach to defining the appropriate set of macroprudential instruments, whether for banks or especially for non-banks, or the optimal strategy for their use to address emerging vulnerabilities. If household debt externalities are within scope, is it better to deal with this risk by restricting mortgage lending directly via loan to income or loan to value limits, or by adding a macroprudential overlay to risk weights on mortgages (Turner (2017))? This lack of a settled approach has some benefits, in making for a diverse range of cross-country experiences. This is giving rise to a period of “learning by doing” among regulators. It does, however, come at some cost. A regime without especially well-defined objectives is likely to suffer greater problems of time-inconsistency. It may also increase uncertainty among outside participants about the likely regulatory policy reaction function.