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The New UK Monetary Arrangements: A View from the Literature

  • Bean, Charles

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 stabilize inflation at the cost of excessively volatile movements in output, or vice versa. The author estimates 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.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 108 (1998)
Issue (Month): 451 (November)
Pages: 1795-1809

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Handle: RePEc:ecj:econjl:v:108:y:1998:i:451:p:1795-1809
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