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Money stock targeting, base drift, and price-level predictability : Lessons from the U.K. Experience

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Author Info

  • Bordo, Michael D.
  • Choudhri, Ehsan U.
  • Schwartz, Anna J.

Abstract

It is controversial whether money stock targeting without base drift (i.e. following a trend-stationary growth path) makes the price level more predictable in the presence of permanent shocks to money demand. Developing a procedure that does not run into the Lucas critique, and applying this procedure to the case of the U.K., the paper finds that the variance of the trend inflation rate in the U.K. would have been reduced by more than one half if the Bank of England had not allowed base drift.

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File URL: http://www.sciencedirect.com/science/article/B6VBW-45D0M3J-38/2/a30be47fb5f17f46d8feab7735ea9c6f
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 25 (1990)
Issue (Month): 2 (March)
Pages: 253-272

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Handle: RePEc:eee:moneco:v:25:y:1990:i:2:p:253-272

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Marvin Goodfriend, 1986. "Interest rate smoothing and price level trend-stationarity," Working Paper 86-04, Federal Reserve Bank of Richmond.
  2. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
  3. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 98-118, February.
  4. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  5. Huizinga, John, 1987. "An empirical investigation of the long-run behavior of real exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 149-214, January.
  6. Bennett T. McCallum, 1982. "Price Level Determinacy with an Interest Rate Policy Rule and Rational Expectations," NBER Working Papers 0559, National Bureau of Economic Research, Inc.
  7. Walsh, Carl E, 1986. "In Defense of Base Drift," American Economic Review, American Economic Association, vol. 76(4), pages 692-700, September.
  8. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
  9. William Poole, 1976. "Interpreting the Fed's Monetary Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 247-260.
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