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Money stock targeting, base drift, and price-level predictability : Lessons from the U.K. Experience

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  • Bordo, Michael D.
  • Choudhri, Ehsan U.
  • Schwartz, Anna J.

Abstract

It is controversial whether money stock targeting without base drift (i.e. following a trend-stationary growth path) makes the price level more predictable in the presence of permanent shocks to money demand. Developing a procedure that does not run into the Lucas critique, and applying this procedure to the case of the U.K., the paper finds that the variance of the trend inflation rate in the U.K. would have been reduced by more than one half if the Bank of England had not allowed base drift.
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  • Bordo, Michael D. & Choudhri, Ehsan U. & Schwartz, Anna J., 1990. "Money stock targeting, base drift, and price-level predictability : Lessons from the U.K. Experience," Journal of Monetary Economics, Elsevier, vol. 25(2), pages 253-272, March.
  • Handle: RePEc:eee:moneco:v:25:y:1990:i:2:p:253-272
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    References listed on IDEAS

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    1. William Poole, 1976. "Interpreting the Fed's Monetary Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 247-260.
    2. Huizinga, John, 1987. "An empirical investigation of the long-run behavior of real exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 27(1), pages 149-214, January.
    3. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-840, September.
    4. Alfred Broaddus & Marvin Goodfriend, 1984. "Base drift and the longer run growth of M1 : experience from a decade of monetary targeting," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 3-14.
    5. McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329.
    6. Goodfriend, Marvin, 1987. "Interest rate smoothing and price level trend-stationarity," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 335-348, May.
    7. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 98-118, February.
    8. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
    9. Walsh, Carl E, 1986. "In Defense of Base Drift," American Economic Review, American Economic Association, vol. 76(4), pages 692-700, September.
    10. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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    Cited by:

    1. Bordo, Michael D. & Schwartz, Anna J., 1999. "Monetary policy regimes and economic performance: The historical record," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 3, pages 149-234 Elsevier.
    2. Christian Bordes & Laurent Clerc, 2007. "Price Stability And The Ecb'S Monetary Policy Strategy," Journal of Economic Surveys, Wiley Blackwell, vol. 21(2), pages 268-326, April.
    3. Nabi, Mahmoud Sami & Suliman, Mohamed Osman, 2011. "Credit rationing, interest rates and capital accumulation," Economic Modelling, Elsevier, vol. 28(6), pages 2719-2729.

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