Unconventional Monetary Policies in UK and US
Unconventional monitory policies where implemented in both US and UK countries which was deemed to be temporary and exceptional but it became influential and long lasting hence modifying the role of central banking. Unconventional monetary tools and QE are instruments designed for governing supply of credit when borrowing cost is zero. These policies were applied in US and UK during liquidity trap phases which hit conventional price base instrument and it became useless. By QE policy, central banks of both UK and US increased monetary base by generating electronic cash and providing liquidity to financial institutions in exchange for long living assets.
2.3.1 Inflation targeting
In UK and US, central banks have inflation target which is explicit and steers in combination with other objectives or alone, as their decisions on monetary policy. The main goal of this policy is to pursue stability of the prices and full employment. The evidence on this has been supportive on inflation target by achieving low inflation and working on inflation expectation. After these two countries adopting IT policy, it became part of broad economic and political reform. This involved reinforcement of institutional structure of making those policies. The great financial crisis put IT in sport hence increasing its doubts on optimal value and validity as monetary policy target which was very meaningful. A large number of economics has advocated importance of increasing targets of both UK and US so as to reduce their constraints.
2.3.2 Central bank independence
This is the degree influence which politicians who are elected have over central bank and the second ability of central bank to use and select instruments with autonomy. In UK and US, the central banks are only independent when setting objectives of monetary policy. As a fact, short term political influence subject of central bank in these countries, was not credible when low inflation was promised. This is because public recognized risk that monetary policy makers were pressured to pursue short-run expansionary policies that would not be consistence with stability of long-run. The importance of operational independent monetary policy for US and UK was indicated by pre-crisis policy. When the crisis started the communication between the central bank and the government became effective. The central banks of both UK and US did all necessary things to stabilize the economy without involving fiscal matters and intervention from the government. Central banks also took unconventional monetary policy measures to coordinate fiscal authorities on matters that concerned debt management reforms and economic stimulus.
References
Borio, C. and Disyatat, P., 2010. Unconventional monetary policies: an appraisal. The Manchester School, 78, pp.53-89.
Gambacorta, L., Hofmann, B. and Peersman, G., 2014. The effectiveness of unconventional monetary policy at the zero lower bound: A cross‐country analysis. Journal of Money, Credit and Banking, 46(4), pp.615-642.
Rogers, J.H., Scotti, C. and Wright, J.H., 2014. Evaluating asset-market effects of unconventional monetary policy: a multi-country review. Economic Policy, 29(80), pp.749-799.
