United Kingdom Inflation Targeting and the Exchange Rate
AbstractThe 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 InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 116 (2006)
Issue (Month): 512 (06)
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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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