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Operational Independence, Inflation Targeting and UK Monetary Policy

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  • Alexander Mihailov

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Abstract

This paper recovers empirically and evaluates the feedback and stance of monetary policy in the United Kingdom throughout the inflation targeting period, implemented since October 1992. Its principal contribution is in comparing two subsamples, before the Bank of England was granted operational independence in May 1997 and after that. Our econometric approach is theoretically motivated by the New Keynesian model and relies on estimating forward-looking Taylor rules via the Generalized Method of Moments from quarterly data. Both final and real-time data, with alternative variable proxies and regression specifications, were used, to find that Taylor rules based on real-time data provide a more reasonable description of British monetary policy. Interestingly, the operational independence subperiod has differed from the pre-independence one - according to our real-time data set - in terms of a weaker response of the Bank of England to inflation but stronger sensitivity to the output gap and a less restrictive stance of monetary policy. Such a reaction would, first of all, characterize the Bank as a flexible inflation targeter, as should be expected by its legal mandate, and not a strict one; secondly, the asymmetry in the feedback function appears justified once the stage in the business cycle is also taken into consideration.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 602.

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Date of creation: 01 Oct 2005
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Handle: RePEc:esx:essedp:602

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  1. Edward Nelson, 2000. "UK monetary policy 1972-97: a guide using Taylor rules," Bank of England working papers 120, Bank of England.
  2. Edward Nelson & Kalin Nikolov, 2001. "UK inflation in the 1970s and 1980s: the role of output gap mismeasurement," Bank of England working papers 148, Bank of England.
  3. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  4. Robert G. King & Alexander L. Wolman, 1996. "Inflation Targeting in a St. Louis Model of the 21st Century," NBER Working Papers 5507, National Bureau of Economic Research, Inc.
  5. Alexander Mihailov, 2007. "Does Instrument Independence Matter under the Constrained Discretionof an Inflation Targeting Goal? Lessons from UK Taylor Rule Empirics," Money Macro and Finance (MMF) Research Group Conference 2006 95, Money Macro and Finance Research Group.
  6. Anton Muscatelli & Patrzio Tirelli & Carmine Trecroci, 1998. "Does Institutional Change Really Matter? Inflation Targets, Central Bank Reform And Interest Rate Policy In The Oecd Countries," Working Papers 1999_20, Business School - Economics, University of Glasgow, revised Jul 1999.
  7. Henderson, Dale W. & McKibbin, Warwick J., 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 221-317, December.
  8. Martin, Christopher & Costas Milas, 2002. "Modelling Monetary Policy: Inflation Targeting in Practice," Royal Economic Society Annual Conference 2002 137, Royal Economic Society.
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Cited by:
  1. Kevin Lee & Nilss Olekalns & Kalvinder Shields, 2013. "Meta Taylor Rules for the UK and Australia; Accommodating Regime Uncertainty in Monetary Policy Analysis Using Model Averaging Methods," Manchester School, University of Manchester, vol. 81, pages 28-53, October.
  2. Alexander Mihailov & Katrin Ullrich, 2008. "Independence and Accountability of Monetary and Fiscal Policy Committees," Economics & Management Discussion Papers em-dp2008-72, Henley Business School, Reading University.
  3. Alexander Mihailov, 2007. "Does Instrument Independence Matter under the Constrained Discretionof an Inflation Targeting Goal? Lessons from UK Taylor Rule Empirics," Money Macro and Finance (MMF) Research Group Conference 2006 95, Money Macro and Finance Research Group.
  4. Philip Arestis & Alexander Mihailov, 2007. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Analysis Research Group Working Papers earg-wp2007-13, Henley Business School, Reading University.
  5. Aleksandra Maslowska, 2009. "Using Taylor Rule to Explain Effects of Institutional Changes in Central Banks," Discussion Papers 46, Aboa Centre for Economics.
  6. Stephen McKnight & Alexander Mihailov, 2012. "Do real balance effects invalidate the Taylor principle in closed and open economies?," Serie documentos de trabajo del Centro de Estudios Económicos 2012-10, El Colegio de México, Centro de Estudios Económicos.
  7. repec:rdg:wpaper:em-dp2007-53 is not listed on IDEAS

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