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Operational Independence, Inflation Targeting and UK Monetary Policy

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  • Mihailov, Alexander

Abstract

This paper recovers empirically and evaluates the feedback and stance of monetary policy in the United Kingdom throughout the inflation targeting period, implemented since October 1992. Its principal contribution is in comparing two subsamples, before the Bank of England was granted operational independence in May 1997 and after that. Our econometric approach is theoretically motivated by the New Keynesian model and relies on estimating forward-looking Taylor rules via the Generalized Method of Moments from quarterly data. Both final and real-time data, with alternative variable proxies and regression specifications, were used, to find that Taylor rules based on real-time data provide a more reasonable description of British monetary policy. Interestingly, the operational independence subperiod has differed from the pre-independence one - according to our real-time data set - in terms of a weaker response of the Bank of England to inflation but stronger sensitivity to the output gap and a less restrictive stance of monetary policy. Such a reaction would, first of all, characterize the Bank as a flexible inflation targeter, as should be expected by its legal mandate, and not a strict one; secondly, the asymmetry in the feedback function appears justified once the stage in the business cycle is also taken into consideration.

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  • Mihailov, Alexander, 2005. "Operational Independence, Inflation Targeting and UK Monetary Policy," Economics Discussion Papers 9982, University of Essex, Department of Economics.
  • Handle: RePEc:esx:essedp:9982
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    Cited by:

    1. P Arestis & A Mihailov, 2009. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Issues Journal Articles, Economic Issues, vol. 14(2), pages 27-54, September.
    2. Stephen McKnight & Alexander Mihailov, 2015. "Do Real Balance Effects Invalidate the Taylor Principle in Closed and Open Economies?," Economica, London School of Economics and Political Science, vol. 82(328), pages 938-975, October.
    3. 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.
    4. Mihailov, Alexander & Ullrich, Katrin, 2007. "Independence and Accountability of Monetary and Fiscal Policy Committees," ZEW Discussion Papers 07-044, ZEW - Leibniz Centre for European Economic Research.
    5. 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.
    6. Anh Dinh Minh Nguyen, 2017. "U.K. Monetary Policy under Inflation Targeting," Bank of Lithuania Working Paper Series 41, Bank of Lithuania.
    7. Aleksandra Maslowska, 2009. "Using Taylor Rule to Explain Effects of Institutional Changes in Central Banks," Discussion Papers 46, Aboa Centre for Economics.
    8. Baker, Andrew, 2015. "The bankers’ paradox: the political economy of macroprudential regulation," LSE Research Online Documents on Economics 61998, London School of Economics and Political Science, LSE Library.

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