Inflation Targeting Monetary Policy in the UK in 1992-1997: Was It Successful?

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Recommended: Merit and disadvantage of inflation targeting

Increase in international economic integration necessitates countries to determine an appropriate monetary policy. It means the control of the money supply or interest rate by the monetary authority (Lipsey and Crystal, 2007). The main purpose of it is to provide the economic stability and growth. The mechanism that provides these changes in the monetary policy is called the monetary transmission mechanism (MTM). Therefore, the aim of this essay is to discuss and analyze the role of the MTM in solving macroeconomic problems. Firstly, this essay will determine how the MTM operates within the economy. Secondly, it will discuss an example of implication of the monetary policy in practice.

To begin with, the government provides monetary policy through affecting an official interest rate or money supply (Anderton 2006). Furthermore, it cannot control both of them simultaneously. This is because the demand for money cannot be controlled. Firstly, changes in the money supply lead to changes in money’s purchasing power. Alterations in the purchasing power of money involve changes in the real interest rate level (Anderton 2006). Since lenders lending power is affected by changes in the money supply. Therefore, they increase or decrease the interest rate level to cause saving or borrowing. Individual’s and firm’s willingness to save or spent depends on the value of wealth that they hold (Anderton 2006). Consequently, it involves shifts in the investment and consumer expenditure rates. Therefore, it in turn leads to shifts in the aggregate demand level.

The main actor that supports government in implementing its monetary policies is the central bank (Anderton 2006). The central bank can conduct its monetary policy in two directions...

... middle of paper ...

...May 18, 2011).

Krugman, P. and R. Wells. 2009. Economics. 2nd ed New-York: Worth Publishers.

Martin, C. and Milas C. 2001. Modelling Monetary Policy: Inflation Targeting in Practice. Uxbridge: BU. Brunel University. http://people.bath.ac.uk/ (assessed May 20, 2011).

Mahajan, S. 2005. The UK economy - Analyses at a glance, 1992-2003. London: ONS. Office for National Statistics. http://www.statistics.gov.uk/ (assessed May 18, 2011).

Lipsey, G., and K. A. Chrystal. 2007. Economics. 11th ed. New York: Oxford University Press.

Sloman, J. and A. Wride. 2009. Economics. 7th ed. New Jersey: Pearson Prentice Hall.

The Monetary Policy Committee. n.d. The Transmission Mechanism of Monetary Policy. London: BE. Bank of England. http://www.bankofengland.co.uk/ (assessed May 17, 2011).

Vittal, N. (2011). Monetary policy lecture. Nazarbayev University UPC.

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