Monetary Policy: The Evaluation

The Question is how successful has the monetary Policy been? 

  • The Global Recession had said to be one of the lowest points for the UK in terms of economics. So before 2008 the Monetary Policy was said to be generally extremely successful because the rate of inflation almost lied down to between 1 and 2%. We do assume it is the Monetary Policy who lead to this but could also be a result of benign conditions like increase in tech.
  • However after 2008 when the recession struck there was said to be deep trouble as there were :
  1. Economic Shocks which had included increase prices of commodity such as food, oil, that had lead the rate of inflation to reach above 3% ( the ceiling)  By october 2011 the rates of RPI and CPI inflation were at three year highs of 5.6% and 5.2%
  2. Between 2008 and 2011 the results of inflation had shown that there was success from the MPC. Their objective wasn’t really to control inflation but instead to help stimulate the economy again. Which they were not successful due to LIQUIDITY TRAP as the interest rate was cut to its lowest- still showed no success. 

As we can also see that there has been quite a lot of measures put in quickly to help the economy flow again, there are time lags when implementing monetary policy? so was the Government impatient in regards of the interest rate?

Has Quantitative Easing showed any improvements?

  • As seen from the first QE it did not show rapid recovery but instead the money was used for the bank’s sake. 
  • The critics of QE had said it was wrong to put QE in the first place as when QE 2 came it was when there was record high inflation and that could have potentially increased it higher
  • However governments wouldn’t high inflation as this would cause depreciation in the currency then eventually it will reduce the prices of exports potentially attracted more exports—> increase in AD
  • And also real value of government debt
  • Finally QE had said to eroded income of pensioners due to the increasing price of government bonds leading to the reduction of the effective of interest of these gilts. 
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