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UK monetary policy under inflation forecast targeting: is behaviour consistent with symmetric preferences?

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  • Naveen Srinivasan
  • Vidya Mahambare
  • M. Ramachandran

Abstract

This paper examines how the Bank of England conducts monetary policy in practice and assesses its policy preferences. Our empirical results using monthly ex post inflation forecast suggest that pursued policy can be characterized by a nonlinear policy reaction function with a deflation bias. We also find evidence of a target range as opposed to a point target for the 1992--5 period. These results are however, not robust to the use of the Bank's own forecast which suggests that pursued policy is consistent with a symmetric point target for inflation. In practice however, inflation has been consistently below the Bank's inflation target in recent years. We argue that a plausible explanation for this is that the MPC had systematically over predicted inflation, which in turn may have resulted in overly restrictive policy. Copyright 2006, Oxford University Press.

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  • Naveen Srinivasan & Vidya Mahambare & M. Ramachandran, 2006. "UK monetary policy under inflation forecast targeting: is behaviour consistent with symmetric preferences?," Oxford Economic Papers, Oxford University Press, vol. 58(4), pages 706-721, October.
  • Handle: RePEc:oup:oxecpp:v:58:y:2006:i:4:p:706-721
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    Cited by:

    1. Leith, Campbell & Moldovan, Ioana & Rossi, Raffaele, 2015. "Monetary and fiscal policy under deep habits," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 55-74.
    2. Patrick Minford & Naveen Srinivasan, 2008. "Are Central Bank Preferences Asymmetric? A Comment," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 37(1), pages 119-126, February.
    3. Anh Dinh Minh Nguyen, 2017. "U.K. Monetary Policy under Inflation Targeting," Bank of Lithuania Working Paper Series 41, Bank of Lithuania.
    4. Ram Sharan Kharel & Christopher Martin & Costas Milas, 2010. "The Complex Response Of Monetary Policy To The Exchange Rate," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(1), pages 103-117, February.
    5. Parthajit Kayal & Naveen Srinivasan, "undated". "Inflation Targeting in the United Kingdom: Is there evidence for Asymmetric Preferences?," Working Papers 2020-196, Madras School of Economics,Chennai,India.
    6. Kevin Lee & Nilss Olekalns & Kalvinder Shields, 2013. "Meta Taylor Rules for the UK and Australia; Accommodating Regime Uncertainty in Monetary Policy Analysis Using Model Averaging Methods," Manchester School, University of Manchester, vol. 81, pages 28-53, October.

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