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

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

Length: 1282 words (3.7 double-spaced pages)

Rating: Strong Essays

Open Document

Essay Preview

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.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

How The Monetary Framework Of Improving Inflation Targeting Within Canada Through Conventional Forward Guidance ( Cfg )

- “How to Improve Inflation Targeting in Canada?” is a researching paper from IMF official website. This research paper is mainly about how to further enhance the monetary framework of improving inflation targeting in Canada through “conventional forward guidance (CFG)” (P3) Improving inflation targeting basically means keep or increase the inflation rate at 2 percent. This amount of inflation targeting was settled since the Federal reserve’s determined that 2 percent “is most matching their long-term mandate for price stability and maximum employment.” (Jared, 2014) The central bank of Canada also use this target, and it did great work on achieving and maintaining this goal....   [tags: Inflation, Central bank, Monetary policy]

Strong Essays
773 words (2.2 pages)

Overview on Inflation Targeting as a Monetary Policy Strategy Essay

- INTRODUCTION Since the 1990s, a large number of industrial countries and a growing number of emerging market and transition economies have adopted inflation targeting as their monetary policy strategy. During the implementation they face many challenges. However, there is no established pattern so countries must learn along the way from one another and more importantly from their own experience. This paper provides an overview on inflation targeting as a monetary policy strategy, necessary preconditions for its successful implementation, its advantages and disadvantages and issues and challenges that emerging market and transition economies face while defining and implementing this monetary...   [tags: transition economies, macroeconomic policy]

Strong Essays
2842 words (8.1 pages)

Credibility of an Inflation-Targeting Regime Essay

- Mishkins view (2011) before the recent crisis, inflation targeting was the standard framework for monetary policy with it being seen as highly successful in OECD countries, with low inflation and low variability of inflation. However the recent crisis not only crushed economic activity, creating the most severe world-wide economic contraction since the Great Depression, but it also seemed to destroy confidence in the ability of central bankers to effectively manage the economy. As a result central banks slashed their benchmark interest rates to what economists call ‘zero lower bound’....   [tags: Recent Crisis, Monetary Policy]

Strong Essays
1367 words (3.9 pages)

Essay about The Best Economic Environment for Inflation Targeting

- Introduction: In the past two decades, a multitude of countries, including Canada and Australia have instituted “explicit inflation targeting” (Svensson, 1996, p.1) for fear of the high cost of “volatile inflation” (Freedman&Laxton, 2009, p. 6).Mishkin offered the definition of inflation targeting (IT). It is a monetary policy strategy intended to achieve price stability within a specific range (Mishkin,2000).As is concisely demonstrated by Mishkin, IT “establishes a transparent and credible commitment” to the precision of the future “numerical objective”(Mishkin,2008).Nonetheless, it is not a prudential policy....   [tags: Monetary Systems, Global Finance]

Strong Essays
1121 words (3.2 pages)

Essay about A Review of 'Is Monetary Policy Overburdened?'

- The article written by Athanasios Orphanides raises the issue of whether or not governments have too high expectation on monetary policy to achieve long-term goals which can only be accomplished “by the appropriate policy mix and the cooperation of other public institutions.” Orphanides focused on three major goals burdened on Central banks (CB) which are full employment, fiscal sustainability and financial stability; and developed his arguments using four typical economies, US, Japan, UK and Euro area....   [tags: Orphanides, expectation on monetary policy]

Strong Essays
1594 words (4.6 pages)

Essay on The Los Angeles Riots of 1992

- “April 26th, 1992, there was a riot on the streets, tell me where were you!. You were sittin' home watchin' your TV, while I was paticipatin' in some anarchy,” these are the lyrics Sublime uses in their song ‘April 26, 1992’ to describe what happened during the Los Angeles Riots of 1992. “First spot we hit it was my liquor store. I finally got all that alcohol I can't afford. With red lights flashin' time to retire, And then we turned that liquor store into a structure fire,” people ,running through the streets, had no pity when demolishing small businesses and taking what ever they may want from them....   [tags: LA Riots 1992]

Strong Essays
1335 words (3.8 pages)

The Taylor Rule And Monetary Policy Essay examples

- This essay will discuss an established economic model called ‘The Taylor Rule’ for monetary policy. It is a key indicator for economists and was devised in 1992 by the reputable economist John Taylor. It is effectively a model that forecasts interest rates. The essay will firstly talk about the history of the Taylor Rule. It will delve further about the workings of the model, its applicability, functionality and an analysis of its strength and weaknesses. It was also discuss the equation and three factors and briefly contrast the different tactics with NAIRU and the Phillips Curve....   [tags: Inflation, Monetary policy, Economics]

Strong Essays
1047 words (3 pages)

Essay about Memories Of 1997 Return With A Vengeance

- Memories of 1997 Return with a Vengeance China’s decision to allow the yuan to weaken has potentially opened a whole new set of economic and financial permutations that would have been seemingly unthinkable barely a week ago. The most important is whether the potential threat of imported deflation from China will force the Fed to delay raising its policy rate. If the Federal Open Market Committee (FOMC) did decide to postpone increasing the federal funds target, then risky assets will consequently breathe a huge sigh of relief....   [tags: Inflation, Central bank, Monetary policy]

Strong Essays
1865 words (5.3 pages)

Essay about The Common Monetary Policy Strategies

- Q1: One of the most common monetary policy strategies employed by countries wishing to achieve price stability is inflation targeting, which involves five different elements. Despite the commonality of its usage, inflation targeting has numerous disadvantages as cited by critics (Mishkin & Eakins, 2012). Delayed signaling is one of the top reasons of why there is a disadvantage to using inflation targeting as a method of monetary policy. In other words, the time it takes for noticeable changes to take effect in the economy after inflation targeting has been implemented creates a delay that causes there to be a question about what truly caused the economic change (Mishkin & Eakins, 2012)....   [tags: Monetary policy, Federal Reserve System]

Strong Essays
1430 words (4.1 pages)

Essay on Monetary Policy Of The Bank

- The Bank of England maintained that monetary policy of the banks aim is to provide cost balance, inexpensive inflation, and promote the economics goals of the government through growth and employment. Inflation target of the Government is two percentage and this is the explanation of price stability. The remit identifies that the character of cost strength in reaching monetary stability extra mostly and delivering the correct states for possible extension in employment and output. It seems that the Chancellor of the Exchequer in the annual Budget statement is the person who declare the yearly inflation target of the government (Bank of England, n.d)....   [tags: Monetary policy, Inflation, Central bank]

Strong Essays
1275 words (3.6 pages)