Evaluate the policies that could be used in your chosen country to meet inflation targets - Essay Example

Running Head: MEETING INFLATION TARGETS EVALUATION OF POLICIES THE UK COULD USE TO MEET INFLATION TARGETS By Professor’s name University name City, State Date Evaluation of Policies That the UK Could Use to Meet Inflation Targets Introduction Inflation targeting is a financial policy approach that central banks employ at a given level or inside a particular scope. In the UK, an inflation rate under 2% is considered harmful to the economy the same way over 2% is. As a result, the BOE has to maintain the rate of inflation at 2% with decimal point margins of error.

Over the past decade, the UK has experienced a number of crises from the global economy and within the region too. This has forced the country to revise its policies towards achieving its inflation target. The following paper discusses four policies that the UK could use to reach its inflation target quickly and using minimal resources. Inflation Target Policies The first policy that the UK could use to meet inflation targets is adopting stringent inflation targeting. Suitable for the UK’s MPC (Momentary Policy System), this policy would mean that the BOE (Bank of England) would not consider curtailing output inconsistency or the expansion effects in their quest for price steadiness (Cobham, 2003, p. 13). In terms of its goal function, the BOE, along with other central banks, they would remove all weight output inconsistency.

Currently, the UK thinks stringent inflation targeting is not in line with the MPC’s legal duties as established in the 1998 BOE Act to meet two goals. The first goal is to keep price steadiness the second one is to support the government’s economic strategy that entails its goals for expansion and development (BOE, 2015). A second policy is a brief run tradeoff between inflation and output equilibrium when the UK economy experiences the kind of crises involving stringent inflation targeting (The Chancellor of the Exchequer, 2013, p. 28). Even though a stringent inflation targeting strategy would make responsibility easier, it would not be successful in accomplishing both goals.

As a result, a credible policy such as a temporary compromise between inflation and output equilibrium in case of unsuccessful policy reactions is necessary. A monetary policy system that that needs constricted inflation targets would not be maintain support and trustworthiness from the public. Tradeoffs are essential to make sure the economy can change successfully in line with the substantial, current post-crisis issues. However, the UK can only implement this policy with a clear devotion to the medium-term price steadiness of a 2% inflation goal (The Chancellor of the Exchequer, 2013, p. 29). Thirdly, prime monetary policy in the UK entails trading off inflation consistency around the inflation target with output consistency around potential (The Chancellor of the Exchequer, 2013, p. 46). With many central banks offering primacy to price steadiness, this interchange becomes another policy the BOE can adopt to meet its inflation targets.

Unlike stringent inflation targeting, adaptable inflation targeting offers a system wherein officials can make decisions about the proper equilibrium of these tradeoffs (The Chancellor of the Exchequer, 2013, p. 29). The BOE can implement such adaptability in multiple forms but is conditional on the economic setting facing policymakers at a particular period. For the UK government to use adaptability successfully, it is vital to anchor medium-term anticipations reliably to a low and steady inflation rate.

A fourth policy is the permission of deviations from the inflation goal in acknowledgement of the tradeoff with output consistency in bringing inflation back on track (The Chancellor of the Exchequer, 2013, p. 32). The BOE can get adaptability from the span of the policy prospect over which it can aim to bring inflation back on course. This span is diverse and conditional on the quality and persistence of crises the UK economy faces (Cobham, 2003, p. 18). A central bank that employed this policy and succeeded is the Bank of Canada, which has dynamically employed adaptability.

This policy essentially intends to bring inflation back on track within a six to eight financial quarters period. However, the policy has differed this horizon between two and eleven financial quarters (Simon, 2015). In relation to a number of the existing challenges across developed economies, the policy views certain conditions as explanation for a lengthier period to get inflation back on target. Lastly, the UK could also adopt a target scope for inflation the same way it did in the early stages of inflation targeting.

The UK discontinued this policy because it considered it additional adaptability. However, a target scope gives more profound reliability in BOE’s communication with the MPC (BOE, 2015). Today, a target of 1 to 3% array by the MPC would mean sustaining reliability while diminishing any hesitations or doubts of an untimely constriction of policy (BBC News, 2015. Dictating the breadth of the inflation target would require cautious judgment considering how crises or uncertainties can induce inflation to differ and how they may influence the monetary transmission machinery (Lilico, 2011).

Nevertheless, the target scope policy poses a bigger question of the advantages of a target scope in comparison to adaptable inflation targeting that already acknowledges the possibility of nonconformities from a specific target. The Reserve Bank of New Zealand used this policy in September 2012 with a 1 to 3% target scope for inflation prior to proceeding to a specific target in the midst of this scope (Groen et al., 2008, p. 7). In addition, the Bank of Canada has been aiming at an inflation scope of 1 to 3% since 1993.

For the UK, concerning over MPC having offered adequate adaptability for nonconformities around the 2% inflation mark was beneficial because it entailed transparency and responsibility encouraged through the open letter framework (Cobham, 2003, p. 18). In conclusion, the UK government can implement five policies to help the BOE meet its set inflation targets. The first policy is adopting stringent inflation targeting, which entails not diminishing performance consistency. Secondly, a brief run tradeoff between inflation and output equilibrium.

A third policy is trading off inflation consistency around the inflation target with output consistency around potential can bring about an adaptable inflation that the UK government can work with. Fourthly, the permission of deviations from the inflation goal works can also aid in meeting the UK’s inflation goals. Lastly, the UK can adopt a target scope for inflation. References BBC News, 2015. Economy tracker: Inflation. [Online] Available at: http://www.bbc.co.uk/ne ws/10612209 [Accessed 7 Feb. 2015]. BOE, 2015, Monetary Policy Committee (MPC), Bank of England, viewed 9 February 2015, http://www.

bankofengland.co.uk/monetarypolicy/Pages/overview.aspx Cobham, D 2003, Why does the Monetary Policy Committee smooth interest rates? University of St Andrews, 42 pages. Groen, J J J, Kapetanios, G, and Price, S 2008, ‘Real time evaluation of Bank of England forecasts for inflation and growth,’ International Journal of Forecasting, 12 pages. Lilico, A 2011, Failure to meet the inflation target has been the fault of successive Chancellors, not the MPC, The Telegraph, viewed 9 February 2015, http://blogs.telegraph.co.

uk/finance/andrewlilico/100011243/failure-to-meet-the- inflation-target-has-been-the-fault-of-successive-chancellors-not-the-mpc/ Simon L 2015, When will interest rates rise? Deflation fears and Eurozone QE means rates may not move this year, as the hawks back down. Available: http://www.thisismoney.co.uk/money/news/article-1607881/When-UK-rates-rise.html. Last accessed 04/02/2015 The Chancellor of the Exchequer 2013, Review of the monetary policy framework, Crown, 68 pages.