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United Kingdom Inflation Targeting and the Exchange Rate

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Author Info

  • Christopher Allsopp
  • Amit Kara
  • Edward Nelson

Abstract

The UK's monetary policy strategy is one of floating exchange rates and inflation forecast targeting, with the targeted measure referring to consumer prices. We consider whether it is welfare-reducing to target inflation in the CPI rather than in a narrower index and the role of the exchange rate in the transmission of monetary policy actions to CPI inflation. It is appropriate to model imports as intermediate goods rather than goods consumed directly by households. This leads to a simpler transmission mechanism of monetary policy while also offering a sustainable explanation of the weakness of the exchange rate/inflation relationship and making consumer price inflation an appropriate monetary policy target. Copyright 2006 Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 116 (2006)
Issue (Month): 512 (06)
Pages: F232-F244

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Handle: RePEc:ecj:econjl:v:116:y:2006:i:512:p:f232-f244

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Postal: Office of the Secretary-General, School of Economics and Finance, University of St. Andrews, St. Andrews, Fife, KY16 9AL, UK
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Web page: http://www.res.org.uk/
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Cited by:
  1. Fan, Jingwen & Minford, Patrick, 2009. "Can the Fiscal Theory of the price level explain UK inflation in the 1970s?," Cardiff Economics Working Papers E2009/26, Cardiff University, Cardiff Business School, Economics Section, revised Mar 2011.
  2. Riccardo DiCecio & Edward Nelson, 2009. "Euro Membership as a U.K. Monetary Policy Option: Results from a Structural Model," NBER Working Papers 14894, National Bureau of Economic Research, Inc.
  3. Maritta Paloviita, 2009. "On the Generality of the New Keynesian Phillips Curves," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(55), pages 7-32, July - Se.
  4. Hatipoglu, Ozan & Alper, C. Emre, 2007. "Estimating Central Bank Behavior in Emerging Markets: The Case of Turkey," MPRA Paper 7107, University Library of Munich, Germany, revised Jan 2008.
  5. Li, Xiao-Ming, 2011. "How do exchange rates co-move? A study on the currencies of five inflation-targeting countries," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 418-429, February.
  6. Lavan Mahadeva & Juan Carlos parra, 2008. "Testing a DSGE model and its partner database," BORRADORES DE ECONOMIA 004507, BANCO DE LA REPÚBLICA.

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