Within limits, it has tolerated periods of above-target inflation in order to support the real economy, while at all times respecting the primacy of the inflation target. That said, it is important not to over-interpret these results. Specifically, the MPC’s average revealed lambda in the past does not reveal a simple monetary rule that can govern decisions regarding inflation control in all scenarios in the future. I stress this point because some have suggested monetary policy ought to follow, or be evaluated against, a simple rule, such as a Taylor (1993) rule. 21  But it is important to recall that, while such rules were estimates  of actual stances of past policy – positive descriptions of central bank behaviour – they have been reinterpreted as guides for what the central bank should do in all circumstances – normative prescriptions. Taking the past as a strict guide to the future is to assume that the nature shocks does not change and that the structure of the economy remains constant. Such stability is hard to square in an era of financial crises; deep, variable technological change; and potentially large shifts in openness. In a changing world, monetary policy decisions would more properly emerge from optimal control approaches to monetary policy, which respect the different nature of shocks and circumstances which the monetary authority must weigh in setting its strategy.
That influence tempted 1  See Tobin (1972), “Inflation and unemployment”, American Economic Review, 62. Inflation can have large redistributive effects. Volatile inflation arbitrarily re-distributes wealth across borrowers and savers. And most recently, there has been a debate about how the stance of monetary policy has affected the distribution of wealth and income. In a series of recent analysis and speeches, members of the MPC have shown that, while distribution is not an objective of monetary policy, the evidence strongly suggests that policy since the crisis has been associated with better outcomes. 2  2  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches  2  authorities to promise low inflation in the future, but then to renege in order to boost activity. Electoral cycles 3  reinforced this predisposition. Firms and households began to anticipate these incentives, however, and eventually pre-empt them. The economy ended up in a worse equilibrium with higher inflation and 4  unemployment. Such time-inconsistent policies contributed to excessive inflation and higher structural unemployment in the UK during the 1970s and 1980s (when inflation averaged 9.5% and unemployment over 7.5%). In light of similar experiences, many societies came to recognise that macro outcomes can be improved by having society first choose the preferred rate of inflation and then delegate operational responsibility to the 5  monetary authority to take the necessary monetary actions to achieve that objective. By “tying the hands” of authorities, time inconsistency is resolved and better outcomes for both inflation and unemployment become possible.