The New UK Monetary Arrangements

A View From the Literature

Bibliographic Data

ID9712486
AuthorsCharles Bean (0000-0002-6524-8280, Centre for Economic Performance; London School of Economics; Centre for Economic Policy Research; and H.M. Treasury, corresponding author)
Year1998
Volume108
Issue451
Pages1795-1809
Publication date1998-11-01
Peer ReviewedYes
Open AccessYes
TypeARTICLE
VenueThe Economic Journal (JOURNAL)
Journal identifiersISSN: 0013-0133 • E-ISSN: 1468-0297
PublisherOxford University Press (OUP) (PUBLISHER)
DOI10.1111/1468-0297.00375
OpenAlexW2020735396
LanguageEN
Citations received5
References cited6

This paper considers the likely operating characteristics of the new UK monetary arrangements introduced in May 1997. The paper first argues that the time inconsistency of policy is not an issue provided the Bank of England is properly independent. However, the current inflation remit from the Chancellor to the Bank specifies a numerical target for the inflation rate, but does not specify how quickly deviations from the target are to be corrected. It is thus an incomplete contract, and there is a danger that the Bank may choose to stabilise inflation at the cost of excessively volatile movements in output, or vice versa. We estimate the optimal policy frontier for the UK economy and show that in practice it is close to rectangular. Consequently all the Bank needs to assume is that the government's preferences are ‘reasonable’ in order to know approximately where to locate on this frontier; the incompleteness of the remit therefore need not be a cause for concern

Central bank · Economics · Frontier · Government (linguistics · Inflation (cosmology · Inflation targeting · Macroeconomics · Monetary economics · Monetary policy · Order (exchange · Political science · Economic Theory and Policy · Finance · Fiscal Policies and Political Economy · Law · Monetary Policy and Economic Impact

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