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B1: In 1997, Britain's incoming Labour Government gave operational independence to the Bank of England (The Central Bank). Under such arrangement, the Chancellor of the
B1: In 1997, Britain's incoming Labour Government gave operational independence to the Bank of England (The Central Bank). Under such arrangement, the Chancellor of the Exchequer (Finance Minister) gave an inflation target (2.5%) to the Bank of England. The job of the Bank of England was therefore to achieve this inflation target by varying the interest rates. Should the prevailing inflation rate be above or below the target, the Governor of the Bank of England would be required to issue an "open letter" explaining why the target was missed. Why did the government choose to give independence to the Central Bank? What operating characteristics would you expect an inflation target to have
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