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Modelling Monetary Policy: Inflation Targeting in Practice

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  • Martin, Christopher

    (Brunel University)

  • Costas Milas

Abstract

This paper estimates a simple structural model of monetary policy in the UK for 1963-2000, focusing on the policy of inflation targeting introduced in 1992. Our main findings are: i) the adoption of inflation targets led to significant changes in monetary policy giving greater weight to inflation; (ii) monetary policy post-1992 is asymmetric as policy makers respond more to upward deviation of inflation away from the target; (iii) in the post-1992 period policymakers may be attempting to keep inflation within the range of 1.4%-2.6% rather than pursuing a point target of 2.5%; (iv) monetary policy is more responsive to inflation when it is further from the target.

Suggested Citation

  • Martin, Christopher & Costas Milas, 2002. "Modelling Monetary Policy: Inflation Targeting in Practice," Royal Economic Society Annual Conference 2002 137, Royal Economic Society.
    • Handle: RePEc:ecj:ac2002:137
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    Cited by:

    1. Castro, Vítor & Sousa, Ricardo M., 2012. "How do central banks react to wealth composition and asset prices?," Economic Modelling, Elsevier, vol. 29(3), pages 641-653.
    2. Cinzia Alcidi , Alessandro Flamini, Andrea Fracasso, 2005. ""Taylored rules". Does one fit (or hide) all?," IHEID Working Papers 04-2005, Economics Section, The Graduate Institute of International Studies, revised Apr 2006.
    3. Edward Nelson, 2000. "UK monetary policy 1972-97: a guide using Taylor rules," Bank of England working papers 120, Bank of England.
    4. Naraidoo, Ruthira & Paya, Ivan, 2012. "Forecasting monetary policy rules in South Africa," International Journal of Forecasting, Elsevier, vol. 28(2), pages 446-455.
    5. Castro, Vitor, 2008. "Are Central Banks following a linear or nonlinear (augmented) Taylor rule?," Economic Research Papers 269883, University of Warwick - Department of Economics.
    6. 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.
    7. Alexandros Kontonikas & Alberto Montagnoli, 2004. "Has Monetary Policy Reacted to Asset Price Movements? Evidence from the UK," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 7(1), pages 18-33, Summer.
    8. Ahmet Benlialper & Hasan Cömert & Nadir Öcal, 2017. "Asymmetric Exchange Rate Policy in Inflation Targeting Developing Countries," ERC Working Papers 1702, ERC - Economic Research Center, Middle East Technical University, revised Feb 2017.
    9. Surico, Paolo, 2003. "US Monetary Policy Rules: the Case for Asymmetric Preferences," Royal Economic Society Annual Conference 2003 199, Royal Economic Society.
    10. Martin Mandler, 2011. "Threshold effects in the monetary policy reaction function of the Deutsche Bundesbank," MAGKS Papers on Economics 201129, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    11. Ruthira Naraidoo & Kasai Ndahiriwe, 2010. "Financial asset prices, linear and nonlinear policy rules. An In-sample assessment of the reaction function of the South African Reserve Bank," Working Papers 201006, University of Pretoria, Department of Economics.
    12. Daniel Komlan Fiodendji, 2012. "Should Canadian Monetary Policy Respond to Asset Prices? Evidence from a Structural Model," Working Papers 1209E, University of Ottawa, Department of Economics.
    13. Fabián Gredig, 2007. "Asymmetric Monetary Policy Rules and the Achievement of the Inflation Target: The Case of Chile," Working Papers Central Bank of Chile 451, Central Bank of Chile.
    14. Paolo Surico, 2002. "Inflation Targeting and Nonlinear Policy Rules: the Case of Asymmetric Preferences," Macroeconomics 0210002, University Library of Munich, Germany, revised 23 Feb 2004.
    15. Holmes, Mark J. & Maghrebi, Nabil, 2006. "Are international real interest rate linkages characterized by asymmetric adjustments?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(4), pages 384-396, October.
    16. Fredj Jawadi & Sushanta K. Mallick & Ricardo M. Sousa, 2011. "Monetary Policy Rules in the BRICS: How Important is Nonlinearity?," NIPE Working Papers 18/2011, NIPE - Universidade do Minho.
    17. 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.
    18. David McMillan, 2008. "Non-linear cointegration and adjustment: an asymmetric exponential smooth-transition model for US interest rates," Empirical Economics, Springer, vol. 35(3), pages 591-606, November.
    19. Thanassis Kazanas & Elias Tzavalis, 2011. "Unveiling the monetary policy rule in euro area," Working Papers 130, Bank of Greece.

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