Financial Stability and Monetary Policy
AbstractWe argue that although UK monetary policy can be described using a Taylor rule in 1992- 2007, this rule fails during the recent financial crisis. We interpret this as reflecting a change in policymakers’ preferences to give priority to stabilising the financial system. Developing a model of optimal monetary policy with preference shifts, we show this provides a superior empirical model over crisis and pre-crisis periods. We find no response of interest rates to inflation during the financial crisis, possibly implying that the UK abandoned inflation targeting during the financial crisis.
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Bibliographic InfoPaper provided by University of Bath, Department of Economics in its series Department of Economics Working Papers with number 19328.
Date of creation: 31 Mar 2010
Date of revision:
monetary policy; financial crisis;
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