The limits of British monetary policy

下面为大家整理一篇优秀的assignment代写范文- The limits of British monetary policy，供大家参考学习，这篇论文讨论了英国货币政策的局限性。货币政策的局限性在美国金融危机爆发之后的英国表现尤为突出。英国的货币政策并未按其理论传导机制所述对稳定宏观经济发挥明显作用。理论上，货币政策能够提供稳定的宏观经济环境，能够抵消由其他因素引起的经济系统的主要波动。正是基于这样的货币政策理论，英国货币当局采取货币政策辅以财政政策，以拯救当前全球经济与金融危机中的英国经济。自金融危机爆发以来，英国货币当局实行宽松的货币政策并没有达到货币当局的预期目标，越发显示出货币政策的局限性。

The limits of monetary policy were particularly acute in the UK after American financial crisis. British monetary policy did not play a significant role in stabilizing the macro economy as described by its theoretical transmission mechanism. Based on the analysis of is-lm-bp model, the main reasons are that the gloomy economic expectation leads to the increase of household savings rate, the decrease of consumption and investment demand, the long time delay of monetary policy, and the lack of further coordination of fiscal policy due to the limited government budget.

In theory, monetary policy can provide a stable macroeconomic environment and offset major fluctuations in the economic system caused by other factors. It is based on such monetary policy theory that British monetary authorities adopt monetary policy supplemented by fiscal policy to save the British economy in the current global economy and financial crisis. However, has the monetary policy adopted by the UK frequently since 2008 achieved the purpose of promoting and maintaining the stability of financial markets? Are the limitations of some monetary policies being exposed? By analyzing the actual effect of monetary policy in Britain after the financial crisis, this paper discusses the limitations of monetary policy.

The Bank's Monetary Policy Committee is only responsible for setting The Bank's base rate and does not determine The central Bank's money supply. Banks must adjust the central bank's money supply through market operations in response to changes in currency and reserve demand, as well as the bank base rate set by the MPC. In this way, Banks can ensure that short-term market rates are broadly in line with the rates set by the MPC.

In general, monetary policy has three tools: open market operations, the reserve requirement ratio and the bank rediscount rate. In Britain, the MPC sets official interest rates but does not determine the central bank's money supply. The bank of England, the central bank, carries out the MPC's interest rate decisions through its financial market operations. The bank of England regulates the central bank's money supply by buying and selling bonds in response to currency and reserve demand.

Changes in official interest rates affect and change the level of market interest rates, asset prices, market expectations or confidence, and exchange rates, and in turn affect the consumption, savings, and investment behavior of individuals and businesses, and the demand for goods and services produced in the UK. Demand for goods and services produced in Britain is closely linked to the local job market. Eventually, changes in official interest rates will affect the level of inflation. The transmission mechanism of monetary policy is shown in figure 1. If the MPC announces low official interest rates, the bank of England will buy back bonds to boost the money supply and liquidity. Then, market interest rates and asset prices will fall, individuals will tend to spend more and save less, and businesses will invest more. In this way, the demand for British local goods and labor will increase, employment will increase, the price of goods and services and wages will increase, which will certainly affect the rate of inflation.

Britain's economy has deteriorated since the second half of 2008. The MPC kept lowering the bank's official base rate. Since the beginning of 2008, the MPC has reduced the official base rate of the bank for eight times in total, from 5.5% in January 2008 to 0.5% in April 2009, and it has continued to this day. On March 5, 2009, the bank of England announced its 75 billion asset purchase program, which began on April 9. The British monetary authority tries to increase the money supply and reduce the investment cost of individuals and businesses by lowering interest rates and asset purchase program, so as to achieve the goal of stimulating demand, increasing employment rate and controlling inflation rate.

Through a series of monetary policies of the monetary authority of the UK, the money supply of the UK increased from 1691.254 billion pounds at the beginning of 2008 to 2032.765 billion pounds at the end of 2009. In 2010, the M4 maintained the steady growth trend after the financial crisis and reached 2210.582 billion pounds by April 2010. The average discount rate on 91-day Treasury bills, the three-month interbank rate, the three-month interbank rate and the 20-year UK government bond yield all fell to varying degrees. From the beginning of 2008 to February 2009, the average discount rate of 91-day Treasury bills fell from 5.01% to 1.24% at the end of 2008 and then to 0.46% at the end of 2009. As of May 2010, this index was 0.49%. The monthly interbank lending rate fell from 5.50% to 2.75% at the end of 2008 and then to 0.55% at the end of 2009. In May 2010, the index rose slightly to 0.60%. The three-month interbank lending rate fell from 5.58% to 0.75% in May 2010, and the yield on British government 20-year bonds fell from 4.46% in early 2008 to 4.32% in May 2010.

At present, with the interest rate continuously decreasing, contrary to the traditional monetary policy theory that the savings rate decreases with the interest rate decreasing, the British household savings rate is increasing, the unemployment rate is rising, people are generally gloomy about the economic expectation, lack of confidence, and reduce consumption and investment, thus resulting in the reduction of aggregate demand.

The trend in loan growth in money supply after the financial crisis also reflects a decline in aggregate demand in the UK. Although Britain's money supply has continued to grow since the beginning of 2008, loan growth in money supply has declined since October 2008 and dropped sharply to 4.9% in January 2009. The fall in loan growth in the money supply reflects a slowdown in the growth of money demand in the UK.

Britain's consumer-price index has been falling for several months. The annual change rate of CPI was 5.2% in September 2008, 4.1% in November, and 3.2% in February 2009.

In general, since the outbreak of the financial crisis, the loose monetary policy implemented by the British monetary authority has not reached the expected goal of the monetary authority, which increasingly shows the limitations of monetary policy.

Since the financial crisis, the following reasons have caused the limitations of British monetary policy:

Generally speaking, the full impact of changes in official interest rates on output takes one year to show up, and the full impact on inflation takes about two years to show up, that is, there is a certain time lag in monetary policy. Milton Friedman argued that it would take at least six or nine or 12 or 15 months for monetary policy to have an impact on the economy.

In the wake of the financial crisis, British households and businesses are generally gloomy about the British economy and lack confidence in economic recovery, which not only reduces consumer spending and loan demand, but also tends to increase savings. This is the key to the failure of monetary policy in the UK to stimulate consumption and investment and thus increase aggregate demand.

Currently, the British government has planned to spend 175 billion pounds to save the flagging economy. In fact, the figure has reached 225 billion pounds. However, the current funding situation of the British government does not warrant the adoption of fiscal policy in the near future. Because in February 2009, the UK public sector cash budget deficit has reached 1.843 billion pounds, the public sector net debt to GDP ratio is 49.0%. In other words, the UK can no longer use fiscal policy but must now use monetary policy.

At present, it is impossible to reduce both interest rates and the "double deficit" in the balance of payments account. Because lower interest rates lead to capital outflows, the pound loses value. But if the UK benefits from the fall in the value of the pound and USES this as an opportunity to boost exports and run a current account surplus, it is possible to achieve both lower interest rates and a smaller balance of payments deficit.

Visible, although the eight times since early 2008, the monetary policy committee cut in official rates, the bank of England to increase money supply M4, bank benchmark interest rate to a relatively low level, but due to households and businesses to the British economic outlook is bleak, lack of confidence, the household savings rate is on the rise, loan growth in money supply in the fall. Resulting in a reduction in final consumer spending or aggregate demand. It can be seen that the UK has fallen into a "liquidity trap" at present, which highlights the limitations of monetary policy after the financial crisis. The key to Britain's recovery is to restore public confidence in its economy.

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