Before we can claim that monetary policy has failed, we must first establish what we would have considered a success. In April 2007, a new inflation level target was set at 2% for the consumer price index. Perhaps though it would be a mistake to try and blame this on a failure of monetary policy, and instead more apt to target the Chancellor of the Exchequer for trying to achieve an unrealistic target. The more practical route would have been to set a target that the economy in its current state would actually have a hope of achieving- impossible targets not only make it difficult to predict the movement of the economy in the future, but also cause an increase in consumer uncertainty and makes the UK appear less reliable to the global financial markets and therefore less attractive to foreign direct investment. A higher level of inflation is also not necessarily a bad thing, especially in the current climate. A rise in asset values may be just what the economy needs to get back on its feet and get consumers spending and investing again. In the eyes of consumers the doom and gloom of the last few years will have destroyed confidence and belief in the economy-, a certain level of inflation may get them believing once again in the true value of money. Furthermore, it may draw the economy away from stagflation and begin to restore economic equilibrium.
Since the financial bubble burst in 2008, it has become clear that a rise in interest rates and a slowing down of the printing of money needs to occur, however what we have actually experienced is interest rates being kept artificially low, a move that is surely harming the economy. When a country is in debt, it needs to spend less, and we are simply not seeing this happen.
It is perhaps true that instead of focusing on the use of fiscal policy to promote growth we should look to the past to see what drove growth prior to 2008, appearing to be human capital and innovation. One could also argue that this was based on a lasting legacy from the Conservative government, as opposed to poor fiscal policies from Labour. The current aims of spending cuts and tax increases in order to eliminate public sector deficit could in fact be harmful in the long run by making the UK economy appear less attractive to foreign direct investment and slowing down growth by reducing the flows of money through the economy. A lack in government expenditure would fail to stimulate increased consumer spending which is arguably what we need in order to get the economy back on track- after all which consumer is going to take the risk of spending their hard earned cash when their own government is retracting their own spending. The government needs to lead by example and that is not what we are seeing at the moment. As Keynes argues, there is a clear and justified role for the government to make active use of fiscal policy measures to manage the level of aggregate demand in the economy, and in the case of the current UK economy a move towards expansionary policy is surely needed.