Measuring inflation expectations in interwar Britain

What caused the recovery from the British Great Depression? A leading explanation – the ‘expectations channel’– suggests that a shift in expected inflation lowered realinterest rates and stimulated consumption and invest-ment. However, few studies have measured, or tested theeconomic consequences of, inflation expectations. In thispaper,wecollecthigh-frequencyinformationfromprimaryand secondary sources to measure expected inflation inthe United Kingdom between the wars. A high-frequencyvector autoregression suggests that inflation expectationswere an important source of the early stages of economicrecovery in interwar Britain.