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The Monetary Policy Decision Process in the United Kingdom

By Geoffrey E. Wood


The thing which has been, is that which shall be; and that which is done is that which shall be done; and there is no new thing under the sun. Ecclesiastes 1:9 Economists outside government frequently criticize governments and central banks. The United Kingdom is no exception. Indeed, it may be a noteworthy example; in 1981, for example, some economists (e.g., Buiter and Miller, 1981) complained that monetary policy was too tight, while others (e.g., Batchelor, GrifIiths, Phylaktis, and Wood, 1981) complained that policy was too expansionary. Missing from these and most other discussions of policy, however, was any analysis of why the monetary authorities acted as they did. Few ascribe what they see as the failures of monetary policy to wickedness--although there are exceptions, of which Ham (1981) is a particularly vigorous example. Given that wickedness is ruled out, it is essential to analyze why the monetary authorities behave as they do. This will not necessarily justify their behavior--although it may reveal it to be the best that can be done given constraints on their action. Rather, understanding of why policy is conducted as it is, as well as of interest in itself, can be of assistance in improving the conduct of policy. This paper attempta to further that process of understanding for the United Kingdom by considering six issues. First, the gradual change in the goals of monetary policy over the past 20 years is set out. Second, the formal aspects of the decision-making process are summarized. This will lead to the examination of three issues: how the target variable for monetary policy was chosen, how the techniques used to attain that target are constrained by the institutional setting, and how the techniques themselve

Topics: Reader, Centre for Banking and International Finance, The City University, London. This
Year: 2013
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