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 real interest rates and
stimulated consumption and investment. However, few studies have measured, or tested the
economic consequences of, inflation expectations. In this paper, we collect high-frequency
information from primary and secondary sources to measure expected inflation in the United
Kingdom between the wars. A VAR model suggests that inflation expectations were an important
source of the early stages of economic recovery in interwar Britain.