In this paper I relate to inflation targeting theory and its framework in the UK. For that purpose I first regard the development of inflation targeting in respect to other monetary policy strategies in sections 2. I will answer the question what the actual target variable is and why one would want to have inflation being low and stable. Then there is some complexity because the development of inflation targeting has to be viewed in relation to paradigmatic debates between Monetarist and New-Keynesian insights.
History[ edit ] Early proposals of monetary systems targeting the price level or the inflation rate, rather than the exchange rate, followed the general crisis of the gold standard after World War I.
Irving Fisher proposed a "compensated dollar" system in which the gold content in paper money would vary with the price of goods in terms of gold, so that the price level in terms of paper money would stay fixed. In his Tract on Monetary ReformJohn Maynard Keynes advocated what we would now call an inflation targeting scheme.
European Central Bank[ edit ] Although the ECB does not consider itself to be an inflation-targeting central bank,  after the inception of the euro in Januarythe objective of the European Central Bank ECB has been to maintain price stability within the Eurozone. Mishkin concluded that "although inflation targeting is not a panacea and may not be appropriate for many emerging market countries, it can be a highly useful monetary policy strategy in a number of them".
In light of the threat of a further fall in inflation and possibly even of a protracted period of deflationon 7 November the CNB declared an immediate commitment to weaken the exchange rate to the level of 27 Czech korunas per 1 euro day-on-day weakening by about 5 percent and to keep the exchange rate from getting stronger than this value until at least the end of later on this was changed to the second half of The CNB thus decided to use the exchange rate as a supplementary tool to make sure that inflation returns to the 2 percent target level.
Such a use of the exchange rate as tool within the regime of inflation targeting should not be confused with a fixed exchange-rate system or with a currency war.
Federal Reserve Ben Bernanke, who stated in that all inflation targeting at the time was of a flexible variety, in theory and practice.
Please help improve it by rewriting it in an encyclopedic style. November New classical macroeconomics and rational expectations hypothesis can explain how and why inflation targeting works. Expectations of firms or the subjective probability distribution of outcomes will be around the prediction of the theory itself the objective probability distribution of those outcomes for the same information set.
However, there is limited success at specifying the relevant model, and the full and perfect knowledge of a given macroeconomic system can be regarded as a comfortable presumption at best.
Knowledge of the relevant model is not feasible, even if high-level econometrical techniques were accessible or adequate identification of the relevant explanatory variables were performed.
So, estimation bias depends on the quantity and quality of information to which the modeller has access. In other words, estimations are asymptotically unbiased with respect to the exploited information.
Meanwhile, consistency can be interpreted similarly. On the basis of asymptotical unbiasedness, a moderated version of the rational expectations hypothesis can be suggested in which familiarity with the theoretical parameters is not a requirement for the relevant model.
An agent with access to sufficiently vast, quality information and high-level methodological skills could specify its own quasi-relevant model describing a specific macroeconomic system.
By increasing the amount of information processed, this agent could further reduce its bias. If this agent were also focal, such as a central bank, then other agents would likely accept the proposed model and adjust their expectations accordingly.
In this way, individual expectations become unbiased as much as possible, albeit against a background of considerable passivity. According to some researches, this is the theoretical background of the functionality of inflation targeting regimes. Also, investor uncertainty is reduced and therefore investors may more easily factor in likely interest rate changes into their investment decisions.
Inflation expectations that are better anchored "allow monetary authorities to cut policy interest rates countercyclically ".Describe the difference between monetary and fiscal policy in the UK and explain how such policies can be used to achieve different macroeconomic government objectives.
The main and most obvious difference between monetary and fiscal policy is that monetary policy is set by the central bank and. The bank of England is touted as the oldest bank over which modern banking is modelled having being founded in - Role of the Bank of England Essay introduction.
The main role of the bank which is different from other banks is that it enjoys domination on the issue of banknotes in England and Wales and with autonomy in setting monetary policy. Free Essay: Monetary policy is the control of monetary variables such as, interest rates and money supply, by governments in order to stimulate the economy.
Fiscal Policy In The UK Economy. Print Reference this. Published: 23rd March, Last Edited: Monetary policy: If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal.
This essay will now turn to look at how the use of monetary and fiscal policy can be used to achieve these macroeconomic objectives. Perhaps one of the most significant changes that the current government introduced was giving the Bank of England independence when it comes to setting interest rates.
Inflation Targeting in the United Kingdom - Benjamin Viertel - Diploma Thesis - Business economics - Banking, Stock Exchanges, Insurance, Accounting - Publish your bachelor's or master's thesis, dissertation, term paper or essayPages: