The economic policy of a government needs to be supportive of a country’s best interests. It may be argued that the main objective of a government is to promote sustained economic growth to improve and increase the nation’s prosperity (Nellis and Parker, 1996). This can only be achieved with structural policies used to enhance the long term economic performance and the creation of a stable macroeconomic environment that will encourage stable growth to take place.
This requires management of both monetary and fiscal policies, which can be examined in terms of the way that they have the aims of creating a stable economic environment which will facilitate growth and the way that the policies manage, and are seen to manage all economic aspects. It is not only the practical management that is important in terms of the direct impact, it is also the way that the policies and actions are perceived, perceptions can also drive markets, such as currency markets, which will have an impact on the economy as well as reflect its’ state.
In the UK since 1992 government policy has been to have underlying inflation remain within the 1% to 4% region. This target has been changed over time, with the target for the present parliament being the lower end of this range (Lexis, 2007).
The general aim of monetary policy is to create an environment of low inflation. Monetary policy has a direct influence on inflation although there will usually be a lag between cause and effect. Interest rates have been a tool used in much a policy for some time, the assessment of interest rates are usually determined by considering the potential inflation rate of the future, usually between one and two years. The assessment itself will take a ride range of information this will include a range of indicators which are indicative of potential inflationary pressures such as the broad and narrow monetary aggregates, exchange-rate movements and asset prices. General inflationary pressures such as wage and price setting is also important, high wage settlements could indicate an increase of disposable income which in turn can create a demand in excess of supply for goods within the economy. If demand is created ahead of the country's capacity to supply goods the result of supply and demand will be price increases, inflation (Nellis and Parker, 2000). Prices considered when looking at monetary policy will also include retail price patterns but may also include the costs of goods such as material input prices and commodity prices.
In the past there has been a great deal of controversy regarding the way that monetary policy is set within any country...