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The Monetary Transmission Mechanism in The United Kingdom: Pass-Through & Policy Ru

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  • Alastair Cunningham
  • Andrew G. Haldane

Abstract

A number of recent papers have used policy simulations from small empirical macro models to assess the efficacy of inflation-forecast targeting. The macro models used to undertake the simulations differ significantly with the assumed degree of openness, an important factor for the analysis. However, the open economy models typically approach the pass-through from exchange rate to import prices and ultimately retail prices in a stylized manner, assuming full and instantaneous pass-through. This paper modifies the open economy macro model presented in Batini and Haldane (1999) to accommodate a variety of pass-through representations, considering time and state-(cycle)-dependent pass-through rules. While the model’s dynamics are affected, the main result of Batini and Haldane – that targeting an inflation forecast dominates targeting current inflation – is robust to the assumed rate of pass-through.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 83.

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Date of creation: Oct 2000
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Handle: RePEc:chb:bcchwp:83

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  1. Fuhrer, Jeffrey C, 1997. "The (Un)Importance of Forward-Looking Behavior in Price Specifications," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 338-50, August.
  2. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers 615, Stockholm University, Institute for International Economic Studies.
  3. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  4. Lars E. O. Svensson, 1999. "Inflation Targeting: Some Extensions," NBER Working Papers 5962, National Bureau of Economic Research, Inc.
  5. Stephen G. Cecchetti, 1996. "Inflation Indicators and Inflation Policy," NBER Working Papers 5161, National Bureau of Economic Research, Inc.
  6. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  7. Andrew P. Blake, 1996. "Forecast Error Bounds By Stochastic Simulation," National Institute Economic Review, National Institute of Economic and Social Research, vol. 156(1), pages 72-79, May.
  8. Svensson, Lars E O, 1999. "Price-Level Targeting versus Inflation Targeting: A Free Lunch?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 277-95, August.
  9. Spencer Dale & Andrew Haldane, 1993. "Interest rates and the channels of monetary transmission: some sectoral estimates," Bank of England working papers 18, Bank of England.
  10. Fuhrer, Jeffrey C & Moore, George R, 1995. "Forward-Looking Behavior and the Stability of a Conventional Monetary Policy Rule," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1060-70, November.
  11. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
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