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Targets, Zones and Asymmetries:A Flexible Nonlinear Model of Recent UK Monetary Policy

  • Virginie Boinet

    ()

  • Christopher Martin

    ()

We estimate a flexible model of the behaviour of UK monetary policymakers in the era of inflation targeting based on a new representation of policymaker’s preferences. This enables us to address a range of issues that are beyond the scope of the existing literature. We find a complex relationship between interest rates and inflation: interest rates are passive when inflation is close to the target but there is an increasingly vigorous response as inflation deviates further from the target. We also find that the response to the output gap is linear and find no evidence of a nonlinear Phillips curve.

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File URL: http://www.brunel.ac.uk/329/efwps/0521.pdf
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Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number 05-21.

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Length: 25 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:bru:bruedp:05-21
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Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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  1. Ruge-Murcia, F.J., 2001. "Inflation Targeting Under Asymmetric Preferences," Cahiers de recherche 2001-04, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  3. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Glenn D. Rudebusch, 2005. "Monetary policy inertia: fact or fiction?," Working Paper Series 2005-19, Federal Reserve Bank of San Francisco.
  5. D H Kim & D R Osborn & M Sensier, 2002. "Nonlinearity in the Fed's Monetary Policy Rule," Centre for Growth and Business Cycle Research Discussion Paper Series 18, Economics, The Univeristy of Manchester.
  6. Orphanides, Athanasios & Wieland, Volker, 1999. "Inflation zone targeting," Working Paper Series 0008, European Central Bank.
  7. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  8. Jagjit Chadha & Philip Schellekens, 1998. "Utility Functions For Central Bankers: The Not So Drastic Quadratic," FMG Discussion Papers dp308, Financial Markets Group.
  9. A. Robert Nobay & David A. Peel, 2003. "Optimal Discretionary Monetary Policy in a Model of Asymmetric Central Bank Preferences," Economic Journal, Royal Economic Society, vol. 113(489), pages 657-665, 07.
  10. repec:esx:essedp:601 is not listed on IDEAS
  11. Surico, Paolo, 2007. "The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 305-324, January.
  12. Martin, Christopher & Costas Milas, 2002. "Modelling Monetary Policy: Inflation Targeting in Practice," Royal Economic Society Annual Conference 2002 137, Royal Economic Society.
  13. Mihailov, Alexander, 2005. "Has more Independence Affected Bank of England's Reaction Function under Inflation Targeting? Lessons from Taylor Rule Empirics," Economics Discussion Papers 8894, University of Essex, Department of Economics.
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