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Monetary Policy Rules in Theory and in Practice: Evidence from the UK and the US

  • Páez-Farrell, Juan

    ()

    (Cardiff Business School)

Given the large amount of interaction between research on monetary policy and its practice, this paper examines whether some simple monetary policy rules that have been proposed in the academic literature, part of which has originated from within central banks, provide a reasonable characterisation of actual policy in the UK and the US. The paper finds that the simple rule that describes best actual US monetary policy is a speed limit rule with dynamics, whilst for the UK it is a forward-looking rule. The simpler dynamics in the UK's monetary policy rule are reflective of the lower persistence of inflation as a result of its policy of inflation targeting.

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Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2007/13.

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Length: 30 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:cdf:wpaper:2007/13
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  1. Paolo Surico, 2003. "Asymmetric Reaction Functions for the Euro Area," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 44-57.
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  8. Carl Walsh, 2001. "Speed Limit Policies: The Output Gap and Optimal Monetary Policy," CESifo Working Paper Series 609, CESifo Group Munich.
  9. Bennett T. McCallum, 1999. "Recent Developments in Monetary Policy Analysis: The Roles of Theory and Evidence," NBER Working Papers 7088, National Bureau of Economic Research, Inc.
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  11. Glenn D. Rudebusch, 2001. "Term structure evidence on interest rate smoothing and monetary policy inertia," Working Paper Series 2001-02, Federal Reserve Bank of San Francisco.
  12. Laurence Ball & Robert R Tchaidze, 2001. "The Fed and the New Economy," Economics Working Paper Archive 465, The Johns Hopkins University,Department of Economics.
  13. Joanne Cutler, 2001. "Core Inflation in the UK," Discussion Papers 03, Monetary Policy Committee Unit, Bank of England.
  14. Edward Nelson, 2000. "UK monetary policy 1972-97: a guide using Taylor rules," Bank of England working papers 120, Bank of England.
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  19. Lars E. O. Svensson, 2003. "What is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," NBER Working Papers 9421, National Bureau of Economic Research, Inc.
  20. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  21. 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.
  22. Athanasios Orphanides & John C. Williams, 2003. "Robust monetary policy rules with unknown natural rates," Finance and Economics Discussion Series 2003-11, Board of Governors of the Federal Reserve System (U.S.).
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  24. Marc Giannoni & Michael Woodford, 2003. "How forward-looking is optimal monetary policy?," Proceedings, Federal Reserve Bank of Cleveland, pages 1425-1483.
  25. Christopher Allsopp & Amit Kara & Edward Nelson, 2006. "United Kingdom Inflation Targeting and the Exchange Rate," Economic Journal, Royal Economic Society, vol. 116(512), pages F232-F244, 06.
  26. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers 155, University of Rochester - Center for Economic Research (RCER).
  27. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  28. Christopher Adam & David Cobham & Eric Girardin, 2005. "Monetary Frameworks and Institutional Constraints: UK Monetary Policy Reaction Functions, 1985-2003," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(4), pages 497-516, 08.
  29. English William B. & Nelson William R. & Sack Brian P., 2003. "Interpreting the Significance of the Lagged Interest Rate in Estimated Monetary Policy Rules," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-18, April.
  30. Minford, Patrick & Perugini, Francesco & Srinivasan, Naveen, 2002. "Are interest rate regressions evidence for a Taylor rule?," Economics Letters, Elsevier, vol. 76(1), pages 145-150, June.
  31. Teruyoshi Kobayashi, 2005. "Optimal monetary policy and the role of hybrid inflation-price-level targets," Applied Economics, Taylor & Francis Journals, vol. 37(18), pages 2119-2125.
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