This article concentrates on an analysis of the UK monetary policy operated by the Bank of England in attempting to control inflation, though some of the points made may have wider validity to other central banks. The essay develops its argumentation along five broad themes across five main sections.
The first section looks at some empirical evidence of the success or failure of the Bank of England’s monetary policy in targeting the UK inflation rate of 2%, insofar as this is able to be assessed in the absence of a detailed regression analysis, for which there is no space in this paper.
The second section discusses some general theoretical issue which inform central banks; approach to monetary policy and specifically inflation targeting. The section is critical of the employment of Dynamic Stochastic General Equilibrium (DSGE) models, including the latest VAR model modification to these models that still rely on modelling, however more efficiently, expectations in relation to improving the understanding of monetary transmission mechanisms.
The third section briefly examines three other central banks for comparison purposes, Japan, the EU and ECB, and the US, discussing their monetary policies in the context of their macroeconomic environments.
The fourth section reverts to the UK situation and critically analyses its current monetary, fiscal, and financial market policies, from theoretical and empirical perspectives.
The fifth and main section suggests a more appropriate mix of monetary and outline fiscal policies. A main sub-section explores and recommends a shift from a monetary policy based on inflation-rate targeting to one where the target is the level of Nominal Gross Domestic Product.
The sixth and final section of the paper briefly sets out the principal conclusion resulting from the analysis.