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Measuring the Policymaker’s Credibility: The Bank of England in ‘nice’ and ‘not-so-nice’ times

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  • Iris Biefang-Frisancho Mariscal

    (University of the West of England, Bristol)

  • Woon Wong

    (University of the West of England, Bristol)

  • Peter Howells

    ()
    (University of the West of England, Bristol)

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    Abstract

    In the course of the last year or so, the Bank of England has come under pressure to raise interest rates on the grounds that a ‘lax’ monetary policy in the face of persistent overshoots of the inflation target risks undermining the Bank’s hard-won credibility. Using the Bayesian as well as time-varying coefficient Kalman-Filter techniques, and four different measures of inflation expectations, this paper looks at the effect of recent events upon the Bank of England’s credibility. Briefly, we find that on most measures of inflation expectations the credibility built up during the relatively benign years from the adoption of an explicit inflation target in 1992 to the onset of the financial crisis in 2007 has deteriorated since. Although our investigation is focused in this paper on the Bank of England, it is easily transferred to the examination of other central banks and represents an advance on other measures of credibility widely used in the existing literature.

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    File URL: http://www2.uwe.ac.uk/faculties/BBS/BUS/Research/economics/1110_Measuring_credibility_v10.pdf
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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 20111110.

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    Date of creation: 10 Jan 2011
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    Handle: RePEc:uwe:wpaper:20111110

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    Keywords: Monetary policy; credibility; Bayesian; Kalman filter;

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    1. Ben S. Bernanke & Ilian Mihov, 1996. "What Does the Bundesbank Target?," NBER Working Papers 5764, National Bureau of Economic Research, Inc.
    2. Breedon, Francis & Hume, Michael, 2007. "Does the European Central Bank have a credibility problem?," Economics Letters, Elsevier, vol. 95(3), pages 438-442, June.
    3. Timothy Besley & Kevin Sheedy, 2010. "Monetary Policy Under Labour," National Institute Economic Review, National Institute of Economic and Social Research, vol. 212(1), pages R15-R33, April.
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