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Macroeconomic Policy Rules in Theory and in Practice

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Author Info
Christopher Allsopp
Abstract

This paper discusses the two-way interaction between policy and academic enquiry regarding rules for monetary policy. The emerging consensus on monetary policy is described; in that context, some of the features of the current UK system are outlined which seem particularly important. From a political-economy point of view, what really matters is that an appropriate policy framework should be instituted with the right general properties; a second set of questions, about improving or even optimising performance, can then be considered. Early worries that publicly-expressed disagreements, and public knowledge of closely-split votes, would work against the credibility of the UK system, now appear unfounded. The relevant meaning of ‘credibility’ of policy is a reputation for competence and trust in the system, and it is argued that the UK system has achieved this reputation. In addition, the monetary policy system in the UK is as transparent and accountable as any in the world. It is argued that the potential costs to credibility and transparency weigh heavily against giving the interest rate another role (e.g. responding to asset-price bubbles) beside pursuit of the inflation target. The paper concludes with some remarks on forecasting procedures in the face of structural change, and on the appropriate combination of monetary and fiscal policy.

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Paper provided by Monetary Policy Committee Unit, Bank of England in its series Discussion Papers with number 10.

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Date of creation: 2002
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Handle: RePEc:mpc:wpaper:10

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  5. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June. [Downloadable!] (restricted)
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  6. Christopher Allsopp, 2002. "The Future of Macroeconomic Policy in the European Union," Discussion Papers 07, Monetary Policy Committee Unit, Bank of England. [Downloadable!]
  7. Athanasios Orphanides, 2000. "The quest for prosperity without inflation," Working Paper Series 15, European Central Bank. [Downloadable!]
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  8. Thomas Sargent & Noah Williams & Tao Zha, 2006. "The Conquest of South American Inflation," NBER Working Papers 12606, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Mervyn King, 1996. "How should central banks reduce inflation? - Conceptual issues," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 25-52. [Downloadable!]
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  11. Allsop, Christopher & Vines, David, 2000. "The Assessment: Macroeconomic Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 1-32, Winter.
  12. Charles Engel, 2002. "The Responsiveness of Consumer Prices to Exchange Rates And the Implications for Exchange-Rate Policy: A Survey Of a Few Recent New Open-Economy..," NBER Working Papers 8725, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 81-97, June. [Downloadable!] (restricted)
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  18. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608.
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  21. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
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  22. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May. [Downloadable!] (restricted)
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  27. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202 National Bureau of Economic Research, Inc. [Downloadable!]
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  28. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 263-267, May. [Downloadable!] (restricted)
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  32. Ben Bernanke & Mark Gertler, 1999. "Monetary policy and asset price volatility," Proceedings, Federal Reserve Bank of Kansas City, pages 77-128. [Downloadable!]
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  33. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
  34. David Dodge, 2002. "The Interaction Between Monetary and Fiscal Policies," Canadian Public Policy, University of Toronto Press, vol. 28(2), pages 187-201, June. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Maria Demertzis & Andrew Hughes Hallett, 2004. "Central bank transparency in theory and practice," Money Macro and Finance (MMF) Research Group Conference 2003 23, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  2. Bennett T. McCallum & Edward Nelson, 2005. "Targeting versus instrument rules for monetary policy," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 225-245. [Downloadable!]
    Other versions:
  3. Bennett T. McCallum & Edward Nelson, 2004. "Targeting vs. Instrument Rules for Monetary Policy," NBER Working Papers 10612, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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