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Inflation Targeting, Transparency and Interest Rate Volatility: Ditching Monetary Mystique in the U.K

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  • Chadha, Jagjit S.
  • Nolan, Charles

Abstract

Monetary authorities often seem reluctant to discuss the conduct of monetary policy. There is a concern that greater openness in monetary policy-making may lead to volatility in financial markets, and specifically in interest rates. To date there is very little direct empirical evidence; however, recent changes in the monetary policy framework in the UK provide an opportunity to gain some insight on this issue. First, the authors present a model of monetary policy showing that the volatility that would otherwise occur to aggregate prices is transmitted to the rate of interest in a tightly specified nominal regime. Under some circumstances, information flows may add to volatility; if volatility is harmful, then central bankers may be right to be reticent. However, the evidence suggests that even though volatility has risen in the recent past, there is no evidence that this volatility is directly attributable to increased information flows per se.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 23 (2001)
Issue (Month): 3 (July)
Pages: 349-366

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Handle: RePEc:eee:jmacro:v:23:y:2001:i:3:p:349-366

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Web page: http://www.elsevier.com/locate/inca/622617

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  1. Svensson, Lars E. O., 1991. "Target zones and interest rate variability," Journal of International Economics, Elsevier, vol. 31(1-2), pages 27-54, August.
  2. Muscatelli, Anton, 1998. "Optimal Inflation Contracts and Inflation Targets with Uncertain Central Bank Preferences: Accountability through Independence?," Economic Journal, Royal Economic Society, vol. 108(447), pages 529-42, March.
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  4. Goodfriend, Marvin, 1986. "Monetary mystique: Secrecy and central banking," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 63-92, January.
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  9. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August.
  10. Bomberger, William A, 1996. "Disagreement as a Measure of Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 381-92, August.
  11. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 81-97, June.
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