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Financial Stability and Monetary Policy

Listed author(s):
  • Martin, Christopher
  • Milas, Costas

We argue that although UK monetary policy can be described using a Taylor rule in 1992- 2007, this rule fails during the recent financial crisis. We interpret this as reflecting a change in policymakers’ preferences to give priority to stabilising the financial system. Developing a model of optimal monetary policy with preference shifts, we show this provides a superior empirical model over crisis and pre-crisis periods. We find no response of interest rates to inflation during the financial crisis, possibly implying that the UK abandoned inflation targeting during the financial crisis.

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File URL: http://opus.bath.ac.uk/19328/1/Bath_Economics_Research_WP_0510.pdf
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Paper provided by University of Bath, Department of Economics in its series Department of Economics Working Papers with number 19328.

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Date of creation: 31 Mar 2010
Handle: RePEc:eid:wpaper:19328
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  1. Vasco Cúrdia & Michael Woodford, 2009. "Credit Spreads and Monetary Policy," NBER Working Papers 15289, National Bureau of Economic Research, Inc.
  2. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  3. Martin, Christopher & Costas Milas, 2002. "Modelling Monetary Policy: Inflation Targeting in Practice," Royal Economic Society Annual Conference 2002 137, Royal Economic Society.
  4. Svensson, L-E-O, 1996. "Inflation Forecast Targeting : Implementaing and Monitoring Inflation Targets," Papers 615, Stockholm - International Economic Studies.
  5. Yuki Teranishi, 2009. "Credit Spread and Monetary Policy," IMES Discussion Paper Series 09-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
  6. Christopher Martin & Costas Milas, 2008. "The Sub-Prime Crisis and UK Monetary Policy," Working Paper Series 31_08, The Rimini Centre for Economic Analysis.
  7. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
  8. Stephan Danninger & Irina Tytell & Ravi Balakrishnan & Selim Elekdag, 2009. "The Transmission of Financial Stress from Advanced to Emerging Economies," IMF Working Papers 09/133, .
  9. 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.
  10. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  11. François-Louis Michaud & Christian Upper, 2008. "What drives interbank rates? Evidence from the Libor panel," BIS Quarterly Review, Bank for International Settlements, March.
  12. repec:esx:essedp:601 is not listed on IDEAS
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