We examine the role and nature of external influences (US as well as German) and changing institutional constraints upon UK monetary policy by estimating Taylor-type reaction functions for three subperiods: 1985-90 (pre-ERM), 1992-97 (post-ERM) and 1997-2000 (MPC). We identify and contrast 'domestic' and 'international' models of the reaction function, and show that while the international model dominates for the first subperiod, a joint model dominates for the post-ERM, and a domestic model in which foreign interest rates function only as instruments dominates for the MPC period. We use these models to comment on the short ERM period, when the authorities reduced interest rates further and faster than they would have done on the basis of the pre-ERM rule, but less than on the post-ERM or MPC (or standard Taylor) rules. We interpret our findings as showing that it is the institutional changes (towards central bank independence) rather than changes in the external regime which have been decisive in the development of UK monetary policy in this period.
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Length: Date of creation: Dec 2001 Date of revision: Handle: RePEc:san:wpecon:0116
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Find related papers by JEL classification: 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 F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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