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Financial Crises and Monetary Policy: Evidence from the UK

Author

Listed:
  • Christopher Martin

    (Department of Economics, University of Bath, UK)

  • Costas Milas

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

Abstract

We analyse UK monetary policy using monthly data for 1992-2010. We have two main findings. First, the Taylor rule breaks down after 2007 as the estimated response to inflation falls markedly and becomes insignificant. Second, policy is best described as a weighted average of a "financial crisis" regime in which policy rates respond strongly to financial stress and a "no-crisis" Taylor rule regime. Our analysis provides a clear explanation for the deep cuts in policy rates beginning in late 2008 and highlights the dilemma faced by policymakers in 2010-11.

Suggested Citation

  • Christopher Martin & Costas Milas, 2011. "Financial Crises and Monetary Policy: Evidence from the UK," Working Paper series 14_11, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:14_11
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    monetary policy; financial crisis;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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