Monetary Policy The Forward Guidance Rationale - 1556 Words

The Forward Guidance Rationale Forward Guidance is an unconventional monetary policy used by the central bank to provide path for future interest rates to individuals and businesses. Recently, the Bank of England has adopted this policy. In this essay, we will explain the rationale behind the use of this policy with the help of IS-LM model along with AD-AS model. The IS-LM model explains the relationship between interest and income level and changes in equilibrium level through the use of monetary and fiscal policy. Therefore, will be adequate in explaining the logic for applying this policy. Whereas, the AD-AS model may help in analysing the inflation condition of this policy. After the Global Financial crises of 2008, UK economy was severely affected and had dipped into recession. Thus, this led to a fall in market confidence, lower GDP growth and higher levels of unemployment. In order to boost the economy, expansionary monetary policies were adopted by the Bank of England. Interest Rates were cut to historic low of 0.5%. However, the economy was still not out of recession and conventional monetary policies failed to work even when interest rates were near zero bound. So, the central bank used unconventional monetary tools such as Quantitative Easing i.e. buying government bonds and injecting money into the economy. This policy was accompanied by a rather new policy known as the Forward Guidance in August, 2013. Furthermore in the UK, ForwardShow MoreRelatedCfa Study Guide15531 Words   |  63 PagesConduct as well as the Global Investment Performance Standards (GIPS ®). The principles and guidance presented in the CFA Institute Standards of Practice Handbook (SOPH) form the basis for the CFA Institute self-regulatory program to maintain the highest professional standards among investment practitioners. â€Å"Guidance† in the SOPH addresses the practical application of the Code and Standards. 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