Advantages and Disadvantages of MPC Approach to controlling Inflation

Criticisms of The MPC approach

1. An inflation target is not enough. If the MPC just targets inflation this may lead to lower growth or higher unemployment
2. If there are shocks to the economy such as higher oil prices this may increase inflation, keeping it in the target may cause a recession.
3. Fine Control of Monetary Policy is not possible. It is difficult to get accurate information about the economy. Time lags in policy mean interest rates affect the economy too late

4. The MPC is not truly independent, govt can set target and appoint people
5. The MPC does not truly reflect the economy. Members tend to be academic economists or bankers, but not business men or trades unions.
6. The low inflation since ’97 could be due to other factors such as increasing productivity and low world wide inflation

 

Benefits of the MPC Inflation Approach

• The MPC have been successful in keeping RPIX close to its target.  Growth has been reasonably strong and unemployment has fallen since ‘97
• Low inflation is important for ensuring stable and continuous growth
• The govt could always change the target if there was a shock to the economy.

The benefits of professional economists are that they take decisions out of vested interest groups such as T unions and businessmen.