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Credibility and the Effectiveness of Inflation Targeting Regimes

Author

Listed:
  • Blake, Andrew P
  • Westaway, Peter F

Abstract

The authors investigate the design of monetary policy in an inflation targeting regime. They argue that a lack of clarity in official descriptions of the operation of monetary policy in the United Kingdom undermines its credibility and effectiveness. The authors describe a model of inflation and use it to argue that policy should be defined and announced as a simple feedback rule, relating changes in interest rates to inflation and other indicators. Incomplete credibility where private sector agents learn about policy is investigated. Using a stochastic version of the model, the expected variance in inflation is found for different rules. Copyright 1996 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Blake, Andrew P & Westaway, Peter F, 1996. "Credibility and the Effectiveness of Inflation Targeting Regimes," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(0), pages 28-50, Suppl..
  • Handle: RePEc:bla:manch2:v:64:y:1996:i:0:p:28-50
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    Citations

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    Cited by:

    1. Kai Leitemo, 2006. "Open-Economy Inflation-Forecast Targeting," German Economic Review, Verein für Socialpolitik, vol. 7, pages 35-64, February.
    2. Gordon de Brouwer & Luci Ellis, 1998. "Forward-looking Behaviour and Credibility: Some Evidence and Implications for Policy," RBA Research Discussion Papers rdp9803, Reserve Bank of Australia.
    3. Huh, Chan G. & Lansing, Kevin J., 2000. "Expectations, credibility, and disinflation in a small macroeconomic model," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 51-86.
    4. 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.
    5. Glenn Hoggarth & Andrew Logan & Lea Zicchino, 2005. "Macro stress tests of UK banks," BIS Papers chapters,in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 392-408 Bank for International Settlements.
    6. Steinsson, Jon, 2003. "Optimal monetary policy in an economy with inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1425-1456, October.
    7. Tibor Hledik, 2003. "Modelling the Second-Round Effects of Supply-Side Shocks on Inflation," Working Papers 2003/12, Czech National Bank, Research Department.
    8. Riccardo DiCecio & Edward Nelson, 2007. "An estimated DSGE model for the United Kingdom," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 215-232.
    9. Glenn Hoggarth & Steffen Sorensen & Lea Zicchino, 2005. "Stress tests of UK banks using a VAR approach," Bank of England working papers 282, Bank of England.
    10. Alastair Cunninghan & Andrew G. Haldane, 2002. "The Monetary Transmission Mechanism in the United Kingdom: Pass-Through and Policy Rules," Central Banking, Analysis, and Economic Policies Book Series,in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 12, pages 331-356 Central Bank of Chile.
    11. Tibor Hlédik, 2004. "Quantifying the Second-Round Effects of Supply-Side Shocks on Inflation," Prague Economic Papers, University of Economics, Prague, vol. 2004(2), pages 121-141.
    12. Miguel A Savastano & Paul R Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
    13. Enrico Tanuwidjaja & Choy Keen Meng, 2005. "Central Bank Credibility and Monetary Policy: Evidence from Small Scale Macroeconomic Model of Indonesia," SCAPE Policy Research Working Paper Series 0514, National University of Singapore, Department of Economics, SCAPE.
    14. Guy Debelle & Miguel A Savastano & Paul R Masson & Sunil Sharma, 1998. "Inflation Targeting as a Framework for Monetary Policy," IMF Economic Issues 15, International Monetary Fund.
    15. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters,in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
    16. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June.
    17. Batini, Nicoletta & Yates, Anthony, 2003. " Hybrid Inflation and Price-Level Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 283-300, June.
    18. Mash, Richard, 2002. "Monetary Policy with an Endogenous Capital Stock When Inflation Is Persistent," Manchester School, University of Manchester, vol. 70(0), pages 55-86, Supplemen.
    19. Leitemo,K., 1999. "Inflation targeting strategies in small open economies," Memorandum 21/1999, Oslo University, Department of Economics.
    20. Marcucci, Juri & Quagliariello, Mario, 2008. "Is bank portfolio riskiness procyclical: Evidence from Italy using a vector autoregression," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(1), pages 46-63, February.
    21. Andrew P. Blake, 2000. "Optimality and Taylor Rules," National Institute Economic Review, National Institute of Economic and Social Research, vol. 174(1), pages 80-91, October.
    22. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    23. Dhaneshwar Ghura & Michael T. Hadjimichael, 1995. "Growth in Sub-Saharan Africa," IMF Working Papers 95/136, International Monetary Fund.
    24. Tatiana Kirsanova, 2004. "Active and passive monetary policy in a non-Ricardian world," Money Macro and Finance (MMF) Research Group Conference 2003 51, Money Macro and Finance Research Group.
    25. Richard Mash, 2000. "The Time Inconsistency of Monetary Policy with Inflation Persistence," Economics Series Working Papers 15, University of Oxford, Department of Economics.

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