IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Lowering the anchor: how the Bank of England's inflation-targeting policies have shaped inflation expectations and perceptions of inflation risk

  • Meredith J. Beechey

Inflation targeting as practiced by the Bank of England has undergone several changes since its adoption in 1992, including redefinition of the goal, measures to increase transparency and the granting of independence to the central bank. These changes are likely to have affected long-run inflation expectations and perceptions of future inflation risk. To that end, this paper estimates a no-arbitrage, affine, factor model of the term structure of inflation compensation in the United Kingdom. The model yields time series of expected inflation and inflation risk premia at short and long horizons estimated in a theoretically consistent manner. The results reveal that long-run inflation expectations drifted down slowly during the first five years of inflation targeting, but inflation risk premia moved down abruptly only once the Bank of England was granted independence. This event, which arguably signaled more credible commitment by the central bank to its inflation anchor, appears to have been more important in shaping inflation expectations and perceptions of inflation risk than changes in the definition of the target or measures to increase transparency.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.federalreserve.gov/pubs/feds/2008/200844/200844abs.html
Download Restriction: no

File URL: http://www.federalreserve.gov/pubs/feds/2008/200844/200844pap.pdf
Download Restriction: no

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-44.

as
in new window

Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:fip:fedgfe:2008-44
Contact details of provider: Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551
Web page: http://www.federalreserve.gov/

More information through EDIRC

Order Information: Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Nicola Anderson & John Sleath, 2001. "New estimates of the UK real and nominal yield curves," Bank of England working papers 126, Bank of England.
  2. Geraats, P. & Eijffinger, S.C.W. & van der Cruijsen, C.A.B., 2006. "Does Central Bank Transparancy Reduce Interest Rates?," Discussion Paper 2006-11, Tilburg University, Center for Economic Research.
  3. Gianna Boero & Jeremy Smith & KennethF. Wallis, 2008. "Uncertainty and Disagreement in Economic Prediction: The Bank of England Survey of External Forecasters," Economic Journal, Royal Economic Society, vol. 118(530), pages 1107-1127, 07.
  4. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
  5. Kim, Don H. & Orphanides, Athanasios, 2012. "Term Structure Estimation with Survey Data on Interest Rate Forecasts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(01), pages 241-272, April.
  6. Gürkaynak, Refet S. & Levin, Andrew & Swanson, Eric T, 2006. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the US, UK and Sweden," CEPR Discussion Papers 5808, C.E.P.R. Discussion Papers.
  7. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
  8. Bianchi, Francesco & Mumtaz, Haroon & Surico, Paolo, 2009. "The great moderation of the term structure of UK interest rates," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 856-871, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2008-44. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.