Monetary Policy Transparency in the UK:The Impact of Independence and Inflation Targeting
AbstractThere 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 InfoPaper 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.
Length: 20 pages
Date of creation: Jan 2006
Date of revision:
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Monetary Policy; transparency; independence; inflation targeting;
Other versions of this item:
- Iris Biefang-Frisancho Mariscal & Peter Howells, 2007. "Monetary Policy Transparency in the UK: The Impact of Independence and Inflation Targeting," International Review of Applied Economics, Taylor & Francis Journals, vol. 21(5), pages 603-617.
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-04-08 (All new papers)
- NEP-CBA-2006-04-08 (Central Banking)
- NEP-FOR-2006-04-08 (Forecasting)
- NEP-MAC-2006-04-08 (Macroeconomics)
- NEP-MON-2006-04-08 (Monetary Economics)
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