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Financial Stability and Monetary Policy

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Author Info

  • Christopher Martin

    ()
    (Department of Economics, University of Bath, UK)

  • Costas Milas

    ()
    (Economics Group, Keele Management School, UK; The Rimini Centre for Economic Analysis, Italy)

Abstract

We 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 Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 12_10.

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Date of creation: Jan 2010
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Handle: RePEc:rim:rimwps:12_10

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Keywords: monetary policy; financial crisis;

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Cited by:
  1. Kasai, Ndahiriwe & Naraidoo, Ruthira, 2011. "Evaluating the forecasting performance of linear and nonlinear monetary policy rules for South Africa," MPRA Paper 40699, University Library of Munich, Germany.
  2. Sushanta Mallick & Ricardo Sousa, 2013. "Commodity Prices, Inflationary Pressures, and Monetary Policy: Evidence from BRICS Economies," Open Economies Review, Springer, vol. 24(4), pages 677-694, September.

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