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Uncovering the implicit short-term inflation target of the Bank of England

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  • Zhu, Sheng
  • Kavanagh, Ella
  • O'Sullivan, Niall

Abstract

We re-investigate the traditional thinking of a fixed inflation target within an inflation-targeting central bank, the Bank of England (BOE). Drawing on extensive readings of the BOE's publications, we investigate whether, in addition to setting the officially announced inflation target based on its medium to long-term considerations, the BOE has short-term inflation targets that periodically differ from its medium-term objective. By estimating a New Keynesian model, we uncover that the Monetary Policy Committee of the BOE set short-term targets while gradually bringing inflation to the announced medium-term inflation objective. We also find that the Bank of England's short-term inflation target helps to explain the inflation path in the UK and the periodic and sustained movements in inflation away from its official target. This implicit short-term inflation target was time-varying in response to exogenous shocks, cost-push shocks and technology shocks.

Suggested Citation

  • Zhu, Sheng & Kavanagh, Ella & O'Sullivan, Niall, 2021. "Uncovering the implicit short-term inflation target of the Bank of England," International Economics, Elsevier, vol. 167(C), pages 120-135.
    • Handle: RePEc:eee:inteco:v:167:y:2021:i:c:p:120-135
    DOI: 10.1016/j.inteco.2021.06.006
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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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