UK policy coordination: the importance of institutional design

• Published in: Fiscal studies Vol. 23; no. 1; pp. 135 - 164
• Main Authors: Bhundia, Ashok, O'Donnell, Gus
• Format: Journal Article
• Language: English
• Published: London, UK The Institute for Fiscal Studies 01-03-2002; Institute for Fiscal Studies; Blackwell Publishing Ltd
• Subjects: Accountability; Banking policy; Central banks; Committees; Coordination; Credibility; E59; E61; E62; Economic fluctuations; Economic policy; Environmental policy; Finance; Financial economics; fiscal and monetary policy; Fiscal policy; Government policy; Inflation; Inflation rates; Institutions; Interest rates; Legislatures; Legitimacy; Macroeconomic policy; Macroeconomics; Monetary policy; Monetary Policy Committee; Policy co-ordination; Policy making; Studies; THE IFS ANNUAL LECTURE; Transparency; United Kingdom; United Kingdom > UK
• ISSN: 0143-5671; 1475-5890
• DOI: 10.1111/j.1475-5890.2002.tb00057.x

This paper considers the principles that underpin the design of the UK's macroeconomic framework, with particular emphasis on the importance of good institutional design in ensuring effective coordination of monetary and fiscal policy when an independent Bank of England Monetary Policy Committee has operational responsibility for setting interest rates. The theoretical literature on policy coordination finds that the cost of central bank independence is less monetary–fiscal coordination. We argue that once account is taken of the institutional arrangements, this conclusion does not hold for the UK. In fact, the UK macroeconomic policy framework represents a significant improvement in policy coordination through mechanisms that allow for greater transparency and accountability in policy-making. Among the measures discussed in the paper is the role of the Treasury Representative on the Bank of England Monetary Policy Committee.