Inflation Targeting in the United Kingdom

Diploma Thesis from the year 2008 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,3, Technical University of Chemnitz, language: English, abstract: Especially since the operational introduction as central bank monetary policy framework in the early 1990s in New Zealand, the United Kingdom (UK), Canada and Sweden, inflation targeting has gained both empirical and theoretical relevance as a monetary policy strategy. 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 (2.2) and (2.3). 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. In the sections (2.4) and (2.4) I present the two fundamental views of how an inflation targeting framework should be modelled. By stating some equations from basic theoretical literature, I try to give a overview about the different characteristics of that monetary policy strategy and how there is still controversy about the way of modelling. Chapter (3) is concerned with the operational framework in the UK, including statements to historical developments at the Bank of England in section (3.1). In particular, gaining of operational independence in setting interest rates-section (3.1.5)-was an important step for the Bank. The present monetary policy framework will be reviewed in section (3.2), in detail relating to the Bank's publication policy-section (3.2.2)-and the inflation forecasting process-section (3.2.3). The Bank of England's model of the transmission mechanism is reviewed in section (3.3). This includes the interest rate setting process, the role of money and the relationship between inflation and inflation expectations. Finally, I discuss some economic effects that changed the British economy since the introduction of inflation targeting-section (3.4).