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External Influences and Institutional Constraints on UK Monetary Policy, 1985-2000


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  • Christopher Adam


  • David Cobham
  • Eric Girardin

    (Méditerranée, Aix-Marseille II)


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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Bibliographic Info

Paper provided by Department of Economics, University of St. Andrews in its series Discussion Paper Series, Department of Economics with number 200116.

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Date of creation: 15 Dec 2001
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Handle: RePEc:san:wpecon:0116

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Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
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Keywords: monetary policy; reaction function; interest rates; exchange rates.;

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  1. 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.
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