Inflation Targeting in the United Kingdom

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, in?ation targeting has gained both empirical and theoretical relevance as a monetary policy strategy. In this paper I relate to in?ation targeting theory and its framework in the UK. For that purpose the author ?rst regards the development of in?ation targeting in respect to other monetary policy strategies. He answers the question what the actual target variable is and why one would want to have in?ation being low and stable. Then there is some complexity because the development of in?ation targeting has to be viewed in relation to paradigmatic debates between Monetarist and New-Keynesian insights. He present the two fundamental views of how an in?ation targeting framework should be modelled. By stating some equations from basic theoretical literature, he gives an overview about the different characteristics of that monetary policy strategy and how there is still controversy about the way of modelling. One chapter is concerned with the operational framework in the UK, including statements to historical developments at the Bank of England. The present monetary policy framework will be reviewed in detail relating to the Bank s publication policy and the in?ation forecasting process. The Bank of England s model of the transmission mechanism is reviewed. This includes the interest rate setting process, the role of money and the relationship between in?ation and in?ation expectations. Finally, he discusses some economic effects that changed the British economy since the introduction of in?ation targeting.