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Monetary Policy Transparency in the UK:The Impact of Independence and Inflation Targeting

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  • Iris Biefang-Frisancho Mariscal
  • Peter Howells

    ()
    (School of Economics, University of the West of England)

Abstract

There is a widespread belief that the transparency of UK monetary policy has increased substantially as a result of the introduction of inflation targeting in 1992 and a number of procedural and institutional reforms which accompanied and followed it. In this paper, we use money market responses (and other data) to test the possibility that improved anticipation of policy moves may be the result of developments other than the institutional reforms popularly cited. We find overwhelming evidence that the switch to inflation targeting itself significantly reduced monetary policy surprises, while subsequent reforms have contributed little. Where we advance substantially on earlier work is to look at the cross-sectional dispersion of agents’ anticipation. If the benefit of transparency is the elimination of policy surprise, there is little benefit if the averagely correct anticipations of agents conceal a wide dispersion of view. The most striking feature is the general decline in cross-sectional one year-ahead forecast uncertainty of the interbank rate. So, even though we do not find that agents on average have improved monetary policy anticipation since 1997, we do find that they have become more unanimous about forecasting future money market rates. However, further testing reveals that it is a simultaneous fall in the dispersion of inflation rate forecasts that explains the increased consensus on interest rates, rather than institutional reforms in 1997 and later.

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Bibliographic Info

Paper provided by Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol in its series Working Papers with number 0601.

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Length: 20 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:uwe:wpaper:0601

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Keywords: Monetary Policy; transparency; independence; inflation targeting;

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References

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  1. John C. B. Cooper, 2004. "Dollarisation in Theory and Practice," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 5(4), pages 79-89, October.
  2. Guglielmo Maria Caporale & Andrea Cipollini, 2002. "The Euro and Monetary Policy Transparency," Eastern Economic Journal, Eastern Economic Association, vol. 28(1), pages 59-70, Winter.
  3. Andrew Clare & Roger Courtenay, 2001. "Assessing the impact of macroeconomic news announcements on securities prices under different monetary policy regimes," Bank of England working papers 125, Bank of England.
  4. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  5. Lars E O Svensson, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Bank of England working papers 56, Bank of England.
  6. Nikolaos Panigirtzoglou & James Proudman & John Spicer, 2000. "Persistence and volatility in short-term interest rates," Bank of England working papers 116, Bank of England.
  7. William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
  8. Charles Bean, 2005. "Monetary Policy in an Uncertain World," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 6(1), pages 31-53, January.
  9. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
  10. Nolan, C. & Chadha, J.S., 1999. "Inflation Targeting, Transparency and Interest Rate Volatility: Ditching 'Monetary Mystique' in the UK," Cambridge Working Papers in Economics 9921, Faculty of Economics, University of Cambridge.
  11. Georgios Chortareas & David Stasavage & Gabriel Sterne, 2003. "Does monetary policy transparency reduce disinflation costs?," Manchester School, University of Manchester, vol. 71(5), pages 521-540, 09.
  12. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York.
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Cited by:
  1. Papadamou, Stephanos, 2013. "Market anticipation of monetary policy actions and interest rate transmission to US Treasury market rates," Economic Modelling, Elsevier, vol. 33(C), pages 545-551.
  2. Carin van der Cruijsen & Sylvester Eijffinger, 2007. "The economic impact of central bank transparency: a survey," DNB Working Papers 132, Netherlands Central Bank, Research Department.
  3. Menno Middeldorp, 2011. "Central Bank Transparency, the Accuracy of Professional Forecasts, and Interest Rate Volatility," Working Papers 11-12, Utrecht School of Economics.
  4. Cruijsen, C.A.B. van der, 2008. "The Economic Impact of Central Bank Transparency," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3130604, Tilburg University.
  5. Amir Kia, 2011. "Developing a Market-Based Monetary Policy Transparency Index: Evidence from the United States," Economic Issues Journal Articles, Economic Issues, vol. 16(2), pages 53-80, September.

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