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Central bank independence and inflation expectations: evidence from British index-linked gilts

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  • Mark M. Spiegel

Abstract

This paper conducts a case study of the impact of the May 6, 1997, announcement of enhanced independence of the Bank of England on estimates of expected future inflation and real interest rates. These are generated from observed yields on conventional and index-linked British gilts. For the longest-term bonds in the study, we find a 34 and 60 bases point decline in expected average future inflation over the life of the bond for one-day and two-week event windows, respectively. These results support the contention that institutional changes alone do affect agents' inflationary expectations.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1998)
Issue (Month): ()
Pages: 3-14

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Handle: RePEc:fip:fedfer:y:1998:p:3-14:n:1

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Keywords: Banks and banking; Central ; Bonds - Great Britain ; Inflation (Finance) ; Great Britain;

References

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  1. Eijffinger, S-C-W & de Haan, J, 1996. "The Political Economy of Central-Bank Independence," Princeton Studies in International Economics 19, International Economics Section, Departement of Economics Princeton University,.
  2. Taylor, John B., 1981. "On the relation between the variability of inflation and the average inflation rate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 57-85, January.
  3. Mark Deacon & Andrew Derry, 1994. "Deriving Estimates of Inflation Expectations from the Prices of UK Government Bonds," Bank of England working papers 23, Bank of England.
  4. Timothy Cogley, 1995. "Inflation uncertainty and excess returns on stocks and banks," Economic Review, Federal Reserve Bank of San Francisco, pages 21-29.
  5. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
  6. Pu Shen, 1995. "Benefits and limitations of inflation indexed Treasury bonds," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 41-56.
  7. Adam S. Posen, 1995. "Declarations Are Not Enough: Financial Sector Sources of Central Bank Independence," NBER Chapters, in: NBER Macroeconomics Annual 1995, Volume 10, pages 253-274 National Bureau of Economic Research, Inc.
  8. Shmuel Kandel & Aharon R. Ofer & Oded Sarig, . "Real Interest Rates and Inflation: An Ex-Ante Empirical Analysis," Rodney L. White Center for Financial Research Working Papers 2-95, Wharton School Rodney L. White Center for Financial Research.
  9. Arak, Marcelle & Kreicher, Lawrence, 1985. "The Real Rate of Interest: Inferences from the New U.K. Indexed Gilts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 399-408, June.
  10. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
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Cited by:
  1. JoAnne Morris & Tonny Lybek, 2004. "Central Bank Governance," IMF Working Papers 04/226, International Monetary Fund.
  2. Hermann Sintim-Aboagye, 2005. "Emerging Economies, Turnover Rates and Inflation Variability: A Comparison of Generalized Maximum Likelihood and SUR Models," Economic Change and Restructuring, Springer, vol. 38(2), pages 167-178, June.
  3. Aleksandra Maslowska, 2008. "Quest for the best: How to measure central bank independence and show its relation with inflation?," Discussion Papers 37, Aboa Centre for Economics.
  4. Juan Angel Garcia & Adrian van Rixtel, 2007. "Inflation-linked bonds from a Central Bank perspective," Occasional Paper Series 62, European Central Bank.
  5. Thorsten Lehnert & Aleksandar Andonov & Florian Bardong, 2009. "TIPS, Inflation Expectations and the Financial Crisis," LSF Research Working Paper Series 09-09, Luxembourg School of Finance, University of Luxembourg.
  6. Kamal, Mona, 2010. "الإطار النظرى للتنسيق بين السياستين المالية والنقدية
    [The Theoretical Framework for the Coordination of Fiscal and Monetary Polices]
    ," MPRA Paper 26856, University Library of Munich, Germany.

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