What does the UK's monetary policy and inflation experience tell us about the transmission mechanism?

Introduction The United Kingdom's monetary policy and inflation history over the past 45 years provides a rich source of information about the effects of monetary actions. It is a reflection of the wealth of this experience that several of the key catchphrases used in macroeconomic policy analysis were originally coined to describe regularities in UK policy-making or UK data: ‘stop–go’, ‘the Phillips curve’ and ‘stagflation’ are prominent examples. Monetary policy in the United Kingdom has undergone several regime changes over this period: from a fixed exchange rate with foreign exchange controls until 1972; to free-floating with no domestic nominal anchor until 1976, followed by a loose system of monetary targeting until the mid-1980s; then a renewed emphasis on exchange rate management (so-called ‘shadowing’ of the Deutsche Mark), which culminated in a fixed exchange rate regime – membership of the Exchange Rate Mechanism (ERM) – from 1990 to 1992. Since 1992, of course, the UK monetary policy regime has been one of inflation targeting – with interest rate decisions made by the Treasury up to May 1997, and by the Monetary Policy Committee of the Bank of England thereafter. For the period as a whole, the swings of inflation and economic growth have also been drastic. Inflation was continually in double digits from 1974 to 1977, and returned there in the early 1980s and early 1990s.