The Monetary Policy And The Monetary Policy

Introduction to the essay

The monetary policy of a country is considered by most economists to be the first and foremost line of defense as far as economic slowdowns or crises are concerned. The Federal Reserve makes this policy and this is beneficial because the economists responsible for the formulation of the monetary policy are in a better position to gauge the appropriateness of the timings as well as the magnitude of the stimulus (Gürkaynak, Sack and Swanson, 2005). Given the deep impact that the monetary policy has on the overall progress and development of the economy, it is imperative to study and evaluate the monetary policy of the country.

Following his appointment as the Governor of the Bank of England in 2013, Mark Carney formulated and implemented the economic strategy of ‘forward guidance’ (Raskin, 2013). This essay is based on the exploration of this strategy in order to evaluate and critically analyze the impact this policy has had on the stability and growth of the previously staggering economy. Prior to the evaluation of the strategy, however, it is important to understand what the economic conditions were before its implementation, what this policy entails and how it has made a change. More importantly, this strategy will be linked to different theoretical models in order to be able to understand the economic significance of this strategy

Forwards Guidance Policy

After the global economic crisis, the economy of UK has been subjected to significant disturbances and due to repercussions in terms of cost shocks, there was an imperative need for some public and private sector repairs. As a result, the output has remained continuously low while inflation has remained persistently higher than target of 2%. Employ...

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...growth rate in the country’s economy during 2008-09.

Source: The Economist, 2014.

However, the situation improved after that. How much of this improvement is owed to the government’s policy of ‘forward guidance’ is debatable. However, the fact remains that the policy is a well-thought-of strategy that is aimed at increasing investments in the economy, which is the greatest need of the time. As the review of the IS-LM model shows the Federal Bank’s decision to stabilize interest rates not only helped stabilize the economy but also led to increase in investments in the economy. Not only this, the policy has made a significant contribution in controlling inflation. But government need to ensure that interest rates are stabilized till the point where output can grow without leading to higher prices, as it will then destroy the whole purpose of this monetary policy.