h collapsed. The strength of sterling at the time, coupled with the high North Sea oil prices, meant a massive erosion of UK competitiveness, and this, together with the crash in monetary growth led to a UK recession. Unemployment started at 8% in 1981 and reached almost 12% (claimant count see appendices) by 1986.The specific costs to the UK of the Lawson Boom were very similar – recession and unemployment. In 1986 there was a dramatic fall in oil prices, back down to almost mid 1970’s levels. This acted in the same way as a cut in and indirect tax would – price decreased and demand increased, and estimations of it’s impact on the economy were as high as a reflation of between 2 and 2.5 % GDP. In 1987 sterling declined in real terms by 15%, which meant increased UK competitiveness abroad, and so more demand for UK goods and services. This, combined with financial sector deregulation and innovation led to a consumption boom. Exchange rate policy at the time was to shadow the Deutschmark, but as the pound was under upward pressure, interest cuts had be made. As far as domestic demand was concerned, this was a bad decision, as it further aggravated the problem of inflation. The expansion in demand became obvious, and so base rates were increased from a low of 7.5% in 1988 to a high of 15% in late 1989 Because consumer demand had been initially slow to respond, interest rates went too high, and by the time they were reduced in October of 1990, the country was starting to enter a recession: household disposable income was actually negative during 1991, which means that consumer spending must have been very low. Unemployment, as a lagged indicator of the state of the economy, didn’t catch up until later, but it peaked at around 10.5% in 1993.ConclusionThe empirical evidence of the correlation between raising interest rates (contracting the money supply and reducing consumer expenditure and demand) and subsequen...
