In this paper we estimate limited dependent variable models for Bank of England monetary policy using monthly data over the period June 1997 to March 2003. During this period the Bank has had operational independence to set the interest rate in order to meet the inflation target set by the Government. We find evidence that the Bank has responded to current output growth rather than inflation which is consistent with targeting future inflation when there is a lag in the response of inflation to the output gap. We also find evidence of an asymmetry in the sense that the link between the interest rate and output growth is stronger when an increase in the interest rate is required than when circumstances dictate it should be cut. On the other hand there is considerably more inertia for interest rate cuts in the sense that a cut in the rate in one month significantly increases the probability of a cut in the next month which is not the case for increases.
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Paper provided by The University of Sheffield, Department of Economics in its series Working Papers with number
2003007.
Find related papers by JEL classification: E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models
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