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Anticipation Of Monetary Policy In UK Financial Markets

  • Peter Lildholdt
  • Anne Vila-Wetherilt

This paper examines the question of whether the ability of market interest rates to predict future policy rate changes in the United Kingdom has changed markedly over the period 1975-2003. Such improvements in predictability could arise from greater transparency in the monetary policy process, together with greater credibility of the Bank of England. Empirical tests, using a simple term structure model, show that predictability has indeed improved over the sample period as a whole, and most markedly after the introduction of inflation targeting in 1992. But closer inspection of the data reveals that predictability did not rise smoothly over time, nor is it possible to generalise this result across maturities. Furthermore, attempts to identify structural breakpoints in a formal way were on the whole unsuccessful. Nonetheless, the paper concludes that, over the longer sample period, the data show a clear improvement in the ability of market participants to predict policy rate changes by the Bank of England.

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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2004 with number 20.

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Date of creation: 17 Sep 2004
Date of revision:
Handle: RePEc:ecj:ac2004:20
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  20. repec:cup:etheor:v:13:y:1997:i:6:p:808-17 is not listed on IDEAS
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