Sorry it has been a while since my first post, the new term hit me harder than first thought with dissertation research and the usual grind but I'm here now!
Today, I thought I'd share with you what I am planning to write my final year dissertation on because I've done a lot of research for it and so, it would be rude not to share it now, wouldn't it?
"No, not an economic blog post?!?!", I hear you say!
Do not fear, as I said in my first post, I will not confuse you or act condescendingly when talking about economics but just sharing with you a few of my general ideas and thoughts of my work so far.
Okay? Good! Now come out from under your coat and keep reading, I promise you will find this, at least a little interesting because it is happening right now, if not where you live but somewhere very near.
Right, first question;
Who is this man?
Did you say Sir Mervyn King?
CORRECT!!! Give yourself a pat on the back.
Second question;
What does he do?
A bit stumped on this one? No worries, let me help you out a little bit.
Sir Mervyn King is the governor of the Bank of England, and when I say the Bank of England I don't mean Natwest, RBS or any other high street, retail bank, I mean the Bank of England.
The Bank of England is what is known as a central bank. Many countries have a central bank, or sometimes a continent i.e. Europe may have a central bank.
Here is a picture of the Bank of England:
Third question;
What does the Bank of England (or a central bank) do?
This is where we have to start getting a bit technical but I promise it won't be too technical!
In England, since the beginning of the 1997 Labour government, the Chancellor at the time, Gordon Brown, put in force an act which gave the Bank of England independence from the state. Independence in this sense is the ability to control certain policy without instruction from the government.
More specifically, the policy in which they are able to control without government interference is monetary policy. Monetary policy is a broad spectrum of different control and instruments which can be used to influence specific aspects of the economy, so for example inflation, growth (by means of GDP) and unemployment.
You might have event heard of some of these tools that the Bank uses, such as interest rate setting and Quantitative Easing (QE). So, you may be thinking, is that bloke you told us about earlier the one who decides all this?
No, in fact it is a group of people that do. The group is known as the Monetary Policy Committee (MPC) who meet on a monthly basis and decide the rate of interest to be set amongst other policy-related decision such as the amount and the decision to enforce QE.
QE seems like a rather complex process from the name they have given it, however the concept is really easy! Trust me. It is as simple as putting more money into the economy. Really, I'm not joking. Okay, it isn't as easy as Classical economist Milton Friedman once put it:
"[price deflation is analogous to] dropping money out of a helicopter."
So, back to my dissertation topic.
So, considering all that we have talked about, what I am concerned with is the effect of central bank independence on the indicators of the economy, like we discussed; inflation, unemployment, output etc.
You may be thinking now, okay....SO WHAT??
Well, I'll tell you what.
It is quite often assumed that by handing control of the instruments that can influence the economy to economist, that we are doing the right thing for the economy, however such was the view of the man above, maybe the economy is something that is not to be fine-tuned with such instruments but a natural mechanism which survives by itself.
As to whether he is right or not, I don't know...kind of the point of the dissertation. However, from a few of my readings that I have done so far, it seems there may be a glimmer of truth in what he said, as studies show that increased independence actually has a negative impact on inflation, which is the main target of the economy for the Bank of England.
Seems a bit self-defeating right? Well, that's why I have chosen to take this topic on, I feel it is a relatively neglected topic in economics and perhaps a lot can be learned by analysing results from policy choices from independent banks on the health of the economy.
Okay, that's enough from me right now but I hope this has been somewhat useful into your understanding of what is going on right now in the UK and why it may not be as effective as you might have thought.
If not, well...what can I say?
Here is a song that I like right now, here it is to listen to as my apology for boring you:
(Keep an eye out for the pigeons, they crack me up!)
