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Base Money Rules in the UK

Author

Listed:
  • Andy Haldane
  • Bennett McCallum
  • Chris Salmon

Abstract

This paper assesses the performance of a simple monetary policy rule - McCallum's rule. This rule targets nominal income using the monetary base as its instrument whilst making an allowance for any on-going changes in money velocity. The paper conducts a range of historical counterfactual simulation exercises to establish the likely impact on the UK economy of using such a rule over the period 1960 to 1994. The paper finds that had the rule been followed over that period a far superior inflationary performance would have resulted. Moreover, this improved performance would not have come about at the expense of heightened output or base money variability. The paper suggests that while such a rule could never substitute a more eclectic approach which uses a wider range of indicators, it could serve as a useful benchmark when assessing whether monetary policy is broadly "on track"; it is a effectively a dynamic M0 monitoring range. As such, the implied profiles from such a simple rule may help provide insurance against the type of "big" policy mistakes which the UK economy has been subject to over the last 25 years.

Suggested Citation

  • Andy Haldane & Bennett McCallum & Chris Salmon, 1996. "Base Money Rules in the UK," Bank of England working papers 45, Bank of England.
  • Handle: RePEc:boe:boeewp:45
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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1996/wp45.pdf
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    References listed on IDEAS

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    Cited by:

    1. Marco Rossi, 1996. "The information content of the short end of the term structure of interest rates," Bank of England working papers 55, Bank of England.
    2. Anthony Yates & Bryan Chapple, 1996. "What Determines the Short-run Output-Inflation Trade-off?," Bank of England working papers 53, Bank of England.
    3. Clive Briault & Andrew Haldane & Mervyn A. King, 1997. "Independence and Accountability," Palgrave Macmillan Books, in: Iwao Kuroda (ed.), Towards More Effective Monetary Policy, chapter 10, pages 299-340, Palgrave Macmillan.
    4. Marco Bianchi & Gylfi Zoega, 1998. "Unemployment persistence: does the size of the shock matter?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(3), pages 283-304.
    5. Nicola Anderson & Francis Breedon, 1996. "UK Asset Price Volatility Over the Last 50 Years," Bank of England working papers 51, Bank of England.
    6. Matthew B Canzoneri & Charles Nolan & Anthony Yates, 1996. "Feasible Mechanisms for Achieving Monetary Stability: a Comparison of Inflation Targeting and the ERM," Bank of England working papers 52, Bank of England.

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