Economics Essay Example | Topics and Well Written Essays - 1750 words - 1

Economics - Essay ExampleThe main reason for the differences coming short may so be given by the treasury was the previous failings of financial policy. In their description of the new monetary framework of October 1999, the principal argument was that previously there had been that numerous shortcomings in the design and conduct of monetary policy. Objectives were often inappropriate or unclear, while decisions were often poorly coordinated with fiscal policy or were made too late to prevent inflationary pressures from building. Roles and responsibilities were also ill-defined, creating the impression that policy decisions could be ground on short-term political considerations. A lack of transparency hindered accountability and meant that policy-makers were unable to build believability (Balls, & ODonnell, 2002).Given that the Treasury was conducting both monetary and fiscal policy prior to giving independence to the cashbox, this is a remarkable statement. It seems to be either a vote of no confidence in the Treasury, or in the incoming government. It was argued that previous governments had often accompanied an apparently tough budget with an interest rate cut, solely to raise interest pass judgment again shortly afterwards, when the budget proved more inflationary than expected. As a result, they proposed that a test of fiscal policy was whether an independent Bank would change interest rates following a budget. Their finding under the new monetary policy arrangements was that interest rate changes did non seem related to the previous budget (Goodhart, 2006).A possible test of what type of policy the Bank is pursuing may be possible when the Bank is faced by a give shock. divert rates control inflation through their effect on join demand. Since a positive aggregate demand shock raises demand and inflation, the correct monetary policy response would be to offset the extend in aggregate demand by higher interest rates. In contrast, a negative supply shock- say an oil price increase,