Inflation targeting, as practised in the UK, represents the most comprehensive adoption of these insights. By delegating monetary policy to an operationally independent central bank, inflation control becomes a more 6  technical, ‘engineering’ problem, as described in Professor Sen’s work on ethics and economics. The committee responsible is given a clear remit – with a lexicographic preference for inflation control – and is charged to do what is necessary to achieve the inflation target over the policy horizon. For example, the Monetary Policy Committee (MPC) of the Bank of England must deliver price stability over the medium term, as defined by 2% CPI inflation. The inflation target is symmetric (meaning we care as much about returning inflation to target from below as from above), and it applies at all times. To be clear, although the method by which the Bank of England achieves the inflation target may be a technical exercise, the UK’s monetary policy framework is grounded in society’s choice of the desired end. These ethical determinations are encoded in the monetary policy remit, from which the MPC takes its orders and against which it is accountable. Society chooses the ends, and, within pre-set boundaries, the MPC determines the means to achieve them. Yet even in this framework monetary policymaking will at times involve striking short-term trade-offs between stabilising inflation and supporting growth and employment. In other words, the monetary policy problem cannot be fully contracted ex ante.
Because monetary policy can also influence demand it can lean against such shocks. If successful, it can stabilise inflation. In this case, no output-inflation trade-off arises. This is the so-called “divine coincidence”. 10  In Figure 2, negative demand shocks would create a tendency for inflation and the output gap to move into the south-west quadrant. Similarly, for positive demand shocks, inflation and output gap would move to the north-east. Because in these cases, there is no trade-off between stabilising inflation and the output gap, it is relatively straightforward for monetary policy to keep inflation and the output gap close to the origin. Chart 1: For much of the great moderation period, data were consistent with predominance of demand shocks… Great moderation  3.5  In practice, data in these quadrants reflect lags in the transmission of monetary policy and other uncertainties: it takes time for monetary policy to  Inflation (%)  affect output, and for output in turn to affect inflation. But if monetary policy has been effective, these  3  deviations would not be expected to be either large or 2.5 Output gap (%)  persistent. This state of affairs characterised much of the “Great Moderation” in the United Kingdom, from  2  -1  0  1  1993 to 2007 (Chart 1), which was effectively a 11  1.5  1  period of demand management. Things are different when shocks drive inflation up or down independently of demand.