Setting Short Term Interest Rates: the Policy Process

Paul Temperton

Chapter 5 in A Guide to UK Monetary Policy, 1986, pp 80-88 from Palgrave Macmillan

Abstract: Abstract In Chapter 2, when discussing the development of the MTFS, we stated that the authorities take into account ‘all the available evidence’ when assessing the relative ‘tightness’ or ‘laxity’ of monetary policy. Although the behaviour of the monetary aggregates remains of primary importance in the assessment of conditions, supplementary information is taken into account: in particular, this includes the behaviour of the exchange rate. Inflation (and inflationary expectations), asset prices and the state of the real economy are also considered. All these factors influence the authorities’ judgement on the appropriate level of interest rates. The authorities operate, however, in an environment which is strongly influenced by market forces. The result is that ‘the level of short term interest rates at any time is determined by the interaction between the markets and the authorities’1. (The ways in which the authorities can influence the level of interest rates are discussed in the next chapter). In this chapter we aim to outline in more detail the factors currently taken into account by the authorities when they decide on the appropriate level of interest rates. It is convenient to discuss these under three key headings: the influence of the monetary aggregates; the exchange rate; and other influences.

Keywords: Exchange Rate; Interest Rate; Monetary Policy; Real Interest Rate; Money Demand (search for similar items in EconPapers)
Date: 1986
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DOI: 10.1007/978-1-349-07996-4_5

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