Economic stability ensures various improvements in the country, such as high living standard, better employment opportunity, stable inflation rate and high GDP and eventually ensure sustainable economic growth. To sustain the economic stability certain steps should be taken by the government. One reform introduced by this government was an improved and strong macroeconomic framework.
As the old government was unsuccessful in ensuring a long live economic stability, the present government had to take some steps to ensure the stability in the country. It can be said that the past government lagged behind because of the failure to create a credible macroeconomic policy.
The present government has taken some steps to strengthen the macroeconomic framework. For this the most important step taken was to put a transparent framework for defining the economic policy. The policymaker can work more easily in a transparent environment, as the causes for a bad situation will be known by all (HM Treasury, 2006). The other steps taken were to define clear policy objectives, ensure efficiency and accountability (Delivering Economic Stability, 2000). Accountability is important not only here but also in all the industries, as it will increase the productivity. "In the UK, the Treasury Select Committee has a central role in holding to account the Treasury for overall economic policy, as well as the Treasury and the Monetary Policy Committee in relation to their own particular responsibilities for macroeconomic policy" (HM Treasury, 2006). The objective of this framework is to improve the economic growth, increase the employment rate and stable the inflation. The two main instruments of this framework are the monetary policy and the fiscal policy. Although these policies were welcomed by the critics, but there is a question mark to the effectiveness of the policies.
"Monetary policy is the government or central bank process of managing money supply to achieve specific goals-such as constraining inflation, maintaining an exchange rate, achieving full employment or economic growth. Monetary policy can involve changing certain interest rates, either directly or indirectly through open market operations, setting reserve requirements, or trading in foreign exchange markets." (Wikipedia, n.d)
In 1997, it was announced that the Monetary Policy Committee of the Bank of England would be responsible for decisions on interest rates, thus making the Bank of England independent (HM Treasury, 2006). The interest rates are set by this committee, in accordance to the inflation. "The Bank's Monetary Policy Committee is made up of nine members - the Governor, the two Deputy Governors, the Bank's Chief Economist, the Executive Director for Markets and four external members appointed directly by the Chancellor. The appointment of external members is designed to ensure that the Monetary Policy Committee benefits from thinking and expertise in addition to that gained inside the Bank of Englan