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Time Horizons and Smoothing in the Bank of England's Reaction Function: The Contrast Between the Standard GMM and Ex Ante Forecast Approaches

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  • David Cobham
  • Yue Kang

Abstract

The monetary policy reaction function of the Bank of England is estimated by the standard GMM approach and the ex-ante forecast method developed by Goodhart (2005), with particular attention to the horizons for inflation and output at which each approach gives the best fit. The horizons for the ex-ante approach are much closer to what is implied by the Bank’s view of the transmission mechanism, while the GMM approach produces an implausibly slow adjustment of the interest rate, and suffers from a weak instruments problem. These findings suggest a strong preference for the ex-ante approach.
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Suggested Citation

  • David Cobham & Yue Kang, 2013. "Time Horizons and Smoothing in the Bank of England's Reaction Function: The Contrast Between the Standard GMM and Ex Ante Forecast Approaches," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(5), pages 662-679, October.
    • Handle: RePEc:bla:obuest:v:75:y:2013:i:5:p:662-679
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    File URL: http://hdl.handle.net/10.1111/j.1468-0084.2012.00709.x
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    1. David Cobham, 2003. "Why does the Monetary Policy Committee smooth interest rates?," Oxford Economic Papers, Oxford University Press, vol. 55(3), pages 467-493, July.
    2. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
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    7. Cobham, David & Kang, Yue, 2012. "Time Horizons And Smoothing In The Bank Of England’s Reaction Function: The Contrast Between The Standard GMM And Ex Ante Forecast Approaches," SIRE Discussion Papers 2012-75, Scottish Institute for Research in Economics (SIRE).
    8. David Cobham & Yue Kang, 2013. "Time Horizons and Smoothing in the Bank of England's Reaction Function: The Contrast Between the Standard GMM and Ex Ante Forecast Approaches," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(5), pages 662-679, October.
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    1. David Cobham & Yue Kang, 2013. "Time Horizons and Smoothing in the Bank of England's Reaction Function: The Contrast Between the Standard GMM and Ex Ante Forecast Approaches," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(5), pages 662-679, October.

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