• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Discuss the measures taken by the current Labour government to enhance the independence of the Bank of England and the arrange

Extracts from this document...

Introduction

Discuss the measures taken by the current Labour government to enhance the independence of the Bank of England and the arrangements put in place to ensure its accountability. Are these institutional arrangements ideal? Throughout 1989 - 1991 New Zealand, Chile and Canada all took the initiative to increase the independence of their central banks and then in 1997 the new Labour Government followed this trend giving the Bank of England independence to set interest rates. With effect from June 1997 the Bank formed a Monetary Policy Committee (MPC) which meets on a monthly basis to determine interest rates. Their role is to decide on the size and direction of change of the nominal base rate needed for the Bank to hit the inflation target set by the Government, which currently stands at 2%. The MPC comprises of the governor, deputy governor and 6 other members, 2 of which are elected by the Governor after consultations with the chancellor and the remaining four are appointed by the Chancellor himself and are considered to be experts in their respective field. Their two main responsibilities are to maintain price stability and support the economic policy of the government through the process of setting short term interest rates to achieve an inflation target. Under previous governments it has been the Chancellor who sets interest rates but this move has given the Bank of England instrumental independence with the ability to control monetary policy, as well as operational responsibility for setting interest rates. ...read more.

Middle

In this vein of thought another concern could be raised over the government's commitment to the independence process. With the measure put it in place the Chancellor has a great deal of influence over who is appointed to the MPC and could therefore fill it with political sympathisers whose decisions could therefore be heavily influenced. Policy conflicts may be regarded as a major concern when deciding on whether an independent bank is ideal or not. With the Bank dictating monetary policy independent from the government, co-ordination between monetary and other government policies could become more difficult. It is possible that a result of the Bank having operational independence would be to impart a deflationary bias to policy as the Bank has an overriding concern with hitting the inflation target and these actions may not benefit the whole economy. Therefore, it may be the case that giving the Bank a degree of independence is no guarantee of macro-economic stability in the long run; particularly as in solving one problem others may be created. For example, a low level of inflation which is caused by a restrictive monetary policy may have a detrimental effect on investment and therefore on economic growth as a result of high interest rates. Rogoff (1985) suggests that whilst and independent and inflation-averse bank will reduce average inflation it will also increase output variability at the same time, making for a more unstable economy. ...read more.

Conclusion

Countries that have a more dependent central bank may not be successful in achieving price stability as other considerations may interfere with this objective such as employment levels. Therefore central bank independence makes a monetary policy dedicated to low levels of inflation more credible. There is no straightforward answer as to whether enhancing the Bank of England's independence is an ideal situation or not as there is a lot of evidence, arguments and support both for and against the Labour government adopting this policy. It seems that an independent and inflation-averse central bank delivers two main benefits in reducing inflation and eliminating politically induced output variability, which, in turn, have further positive effects on the economy. The general assumption seems to be that a bank less prone to political manipulation will behave more predictable, thus enhancing both economic stability and growth. In addition it appears that monetary policy under this regime has also proved to be more open and transparent than previously. But in contrast to this you also face the potential problems of policy conflicts and concerns over the competence of those chosen to be part of the MPC among others, as problems in these areas could lead to a less than optimal outcome for the economy. However, it is clear that the Bank of England have been successful to this point in achieving their objective set out for them by the current Labour government so, despite the general opinions on central bank independence, these institutional arrangements could be just as the Chancellor described them; 'a British solution for British needs'2. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Marked by a teacher

    The aim of this essay is to discuss the relevance of John Keynes to ...

    5 star(s)

    The effects of the credit crunch can also be observed on figure 2 as GDP experience a sharp decline within the same time scale after a long period of relative stability. Figure 4 above shows the Business cycle. The business cycle is "the periodic fluctuations of national output round its long-term trend" ( Sloman J,2001:256).

  2. Marked by a teacher

    I will be evaluating on the article "UK inflation drops to Bank target" by ...

    3 star(s)

    Furthermore CPI is more commonly used in other countries such as United States. Therefore in this article analysis, I will mainly use CPI, a more common method of measuring inflation. The percentage change in the CPI of two consecutive years is called the Inflation Rate.

  1. What are the government objectives? Explain why each is important and how the government ...

    to move to an alternative occupation. I will now look at how the government can achieve and maintain low inflation levels. Inflation is an overall increase in prices in an economy. This reduces the worth or value of money as its purchasing power falls.

  2. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    This is a particularly useful method to use within the UK as the majority of people own their own homes, as most of these people will have a mortgage and therefore any change in interest rates will directly affect their spending power.

  1. Budget 2004-05 and Economic Analysis of Pakistan

    EXTERNAL RESOURCES The budget estimates 2004-2005 have been projected at Rs 156355 million which is 8% higher than the revised estimates of Rs 144820 million for 2003-2004. Details of receipts from external resources are given in Table below. (Rs.in Million)

  2. Discuss appropriate policy measures that the Singapore government may undertake to increase the net ...

    Singaporeans may substitute local goods for foreign goods due to the higher import prices. As long as the sum of price elasticity of demand for exports and imports are greater than 1, there would be a rise in net exports which would then increases economic activity and hence raises the country's national income.

  1. Various Macro-Economic Questions and answers

    These costs might be affected by a change in the exchange rate which causes fluctuations in the prices of imported products. A fall (depreciation) in the exchange rate increases the costs of importing raw materials and component supplies from overseas Government taxation and subsidy: Changes to producer taxes and subsidies

  2. Discuss the view that governments of countries with large budget deficits should take measures ...

    This debt can be ?toxic?, as money received through tax revenue wouldn?t be used by the government to stimulate economic growth through certain policies, but be used to pay back the interest on the borrowed money, which in yearly periods would amount to a massive amount, significantly more than the amount actually borrowed.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work