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Financial crises and monetary policy: Evidence from the UK

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  • Martin, Christopher
  • Milas, Costas

Abstract

We analyse UK monetary policy using monthly data for 1992–2010. We have two main findings. First, the Taylor rule breaks down after 2007 as the estimated response to inflation falls markedly and becomes insignificant. Second, policy is best described as a weighted average of a “financial crisis” regime in which policy rates respond strongly to financial stress and a “no-crisis” Taylor rule regime. Our analysis provides a clear explanation for the deep cuts in policy rates beginning in late 2008 and highlights the dilemma faced by policymakers in 2010–11.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 9 (2013)
Issue (Month): 4 ()
Pages: 654-661

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Handle: RePEc:eee:finsta:v:9:y:2013:i:4:p:654-661

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Web page: http://www.elsevier.com/locate/jfstabil

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Keywords: C51; C52; E52; E58; Monetary policy; Financial crisis;

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Cited by:
  1. Gunes Kamber & Christoph Thoenissen, 2011. "The financial accelerator and monetary policy rules," CDMA Working Paper Series 201115, Centre for Dynamic Macroeconomic Analysis.

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