Monetary Policy Case Study

Inflation Targeting as a Monetary Policy Tool: The Case of Bank of England

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Abstract:
Since Adam Smith's time, stable price level has been a gospel. The assumption - that economic growth, when achieved at a healthy inflation level, will keep defuse economic turbulences - makes economists and policymakers formulate the right dosage of inflation. Many policies and mechanisms, to hit that right balance, have been professed and implemented in various economies. Their efficiency has been put to litmus test every time the respective economies felt a riffle, notwithstanding the intensity. The latest addition to these mechanisms is inflation targeting. Though New Zealand has been the harbinger of inflation targeting, its success in the UK for a decade and half has won it large fanfare. UK adopted inflation targeting, more out of compulsion than conviction in 1992, when it needed an anchor to induce monetary discipline and guide all other variables. From then on, the new mechanism has been delivering goods till 2007, when for the first time it strayed from its target. Doubters have not refrained from casting shadows over the efficacy of inflation targeting and are preaching new mechanisms.This case study helps discuss the effectiveness of inflation targeting as a monetary policy tool in a globalised environment and also to debate over the central bank's role in striking a balance between growth and inflation.

Pedagogical Objectives:

• To discuss the reasons for inflation and its effect on the economy
• Inflation targeting as a monetary policy tool
• Reasons for adopting inflation targeting.

Keywords : Bank of England, Inflation, Monetary Policy and Central Banks, Inflation Targeting, Consumer Price Index, Price Stability, Monetary Policy Case Study, Trend Inflation, Operational Independence of a Central Bank, Aggregate Price Index, Monetary Targeting, Exchange Rate Targeting