Inflation targeting in the United Kingdom

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Since its operational introduction as a central bank monetary policy framework in the early 1990s in New Zealand, the UK, Canada, and Sweden, inflation targeting has gained significant empirical and theoretical relevance. This paper explores inflation targeting theory and its framework in the UK. The author first examines the development of inflation targeting in relation to other monetary policy strategies, addressing what the actual target variable is and the importance of maintaining low and stable inflation. The complexity of this topic arises from the paradigmatic debates between Monetarist and New-Keynesian perspectives. The author presents two fundamental views on how an inflation targeting framework should be modeled, providing equations from foundational theoretical literature to illustrate the varying characteristics of this strategy and the ongoing controversies surrounding its modeling. A chapter focuses on the operational framework in the UK, detailing historical developments at the Bank of England. The current monetary policy framework is reviewed, including the Bank’s publication policy and inflation forecasting process. Additionally, the Bank of England’s model of the transmission mechanism is analyzed, covering interest rate setting, the role of money, and the relationship between inflation and inflation expectations. Finally, the paper discusses the economic effects that have transformed the British economy s