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Interest Rate Setting and Inflation Targeting: Evidence of a Nonlinear Taylor Rule for the United Kingdom

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  • Taylor Mark P.

    (University of Warwick)

  • Davradakis Emmanuel

    (Eurobank EFG)

Abstract

We examine potential nonlinear behaviour in the conduct of monetary policy by the Bank of England. We find significant nonlinearity in this policy setting, and in particular that the standard Taylor rule really only begins to bite once expected inflation is significantly above its target. This suggests, for example, that while the stated objective of the Bank of England is to pursue a symmetric inflation target, in practice some degree of asymmetry has crept into interest-rate setting. We argue that, nevertheless, the very predictability of the policy rule, especially when set out in a highly plausible and intuitive nonlinear framework, is perhaps one reason why the United Kingdom has, since the early 1990s, enjoyed price stability combined with relatively strong growth.

Suggested Citation

  • Taylor Mark P. & Davradakis Emmanuel, 2006. "Interest Rate Setting and Inflation Targeting: Evidence of a Nonlinear Taylor Rule for the United Kingdom," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(4), pages 1-20, December.
    • Handle: RePEc:bpj:sndecm:v:10:y:2006:i:4:n:1
    DOI: 10.2202/1558-3708.1359
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    References listed on IDEAS

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