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Operational independence, inflation targeting, and UK monetary policy

  • ALEXANDER MIHAILOV

This paper evaluates empirically the feedback and stance of monetary policy in the United Kingdom under inflation targeting, implemented since October 1992. Its principal contribution is in comparing two subsamples, before the Bank of England was granted operational independence in May 1997 and after that. We find that the operational independence subperiod has differed from the preindependence one in terms of a weaker response to inflation but stronger sensitivity to the output gap and a less restrictive stance of monetary policy. Such behavior appears justified given the Bank's mandate and the evolution of the business cycle.

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Article provided by M.E. Sharpe, Inc. in its journal Journal of Post Keynesian Economics.

Volume (Year): 28 (2006)
Issue (Month): 3 (April)
Pages: 395-421

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Handle: RePEc:mes:postke:v:28:y:2006:i:3:p:395-421
Contact details of provider: Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=109348

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  1. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  2. Christopher Martin & Costas Milas, 2004. "Modelling Monetary Policy: Inflation Targeting in Practice," Economica, London School of Economics and Political Science, vol. 71(281), pages 209-221, 05.
  3. Robert G. King & Alexander L. Wolman, 1996. "Inflation Targeting in a St. Louis Model of the 21st Century," NBER Working Papers 5507, National Bureau of Economic Research, Inc.
  4. Nelson, Edward & Nikolov, Kalin, 2003. "UK inflation in the 1970s and 1980s: the role of output gap mismeasurement," Journal of Economics and Business, Elsevier, vol. 55(4), pages 353-370.
  5. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 2000. "Does Institutional Change Really Matter? Inflation Targets, Central Bank Reform and Interest Rate Policy in the OECD Countries," CESifo Working Paper Series 278, CESifo Group Munich.
  6. Alexander Mihailov, 2005. "Has More Independence Affected Bank of England's Reaction Function under Inflation Targeting? Lessons from Taylor Rule Empirics," Economics Discussion Papers 601, University of Essex, Department of Economics.
  7. M Kesriyeli & D R Osborn & M Sensier, 2004. "Nonlinearity and Structural Change in Interest Rate Reaction Functions for the US, UK and Germany," Centre for Growth and Business Cycle Research Discussion Paper Series 44, Economics, The Univeristy of Manchester.
  8. Dale W. Henderson & Warwick J. McKibbin, 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," International Finance Discussion Papers 458, Board of Governors of the Federal Reserve System (U.S.).
  9. Nelson, Edward, 2001. "UK Monetary Policy 1972-97: A Guide Using Taylor Rules," CEPR Discussion Papers 2931, C.E.P.R. Discussion Papers.
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