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An overhaul of doctrine: the underpinning of U.K. inflation targeting

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  • Edward Nelson

Abstract

This paper argues that the inflation targeting regime prevailing in the United Kingdom is not the result of a change in policymaker objectives. By conducting an analysis of U.K. policymakers that parallels Romer and Romer’s (2004) study of Federal Reserve Chairmen, I demonstrate that policymaker objectives have been essentially unchanged over the past five decades. Instead, the crucial underpinning of U.K. inflation targeting has been an overhaul of doctrine—a changed view of the transmission mechanism. This overhaul can be understood in terms of changes in policymakers’ views on the values of a few key parameters in their specifications of the economy’s IS and Phillips curves. Specifically, the changed views pertain to the issues of whether interest rates enter the IS equation, and the extent of policymaker influence on those rates; whether the level of the output gap appears in the Phillips curve when the gap is negative; and whether a speed-limit term matters for inflation dynamics. Contrary to conventional wisdom, changing views on the expected-inflation term in the Phillips curve do not play a role.

Suggested Citation

  • Edward Nelson, 2007. "An overhaul of doctrine: the underpinning of U.K. inflation targeting," Working Papers 2007-026, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2007-026
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    Cited by:

    1. Blake, Andrew P & Markovic, Bojan, 2008. "The conduct of global monetary policy and domestic stability," Bank of England working papers 353, Bank of England.
    2. Georgios P. Kouretas & Mark E. Wohar, 2012. "The dynamics of inflation: a study of a large number of countries," Applied Economics, Taylor & Francis Journals, vol. 44(16), pages 2001-2026, June.
    3. Kenneth Kuttner & Adam Posen, 2011. "How Flexible Can Inflation Targeting Be and Still Work?," Department of Economics Working Papers 2011-10, Department of Economics, Williams College, revised Sep 2011.
    4. Ornela SHALARI & Fejzi KOLANECI, 2014. "Statistical analysis of the inflation in the case of Albania," EuroEconomica, Danubius University of Galati, issue 2(33), pages 67-77, November.
    5. Valadkhani, Abbas, 2014. "Switching impacts of the output gap on inflation: Evidence from Canada, the UK and the US," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 270-285.
    6. Meenagh, David & Minford, Patrick & Nowell, Eric & Sofat, Prakriti & Srinivasan, Naveen, 2009. "Can the facts of UK inflation persistence be explained by nominal rigidity?," Economic Modelling, Elsevier, vol. 26(5), pages 978-992, September.
    7. Abbas Valadkhani, 2015. "Asymmetric size-dependent effects of the output gap on inflation: US evidence from the last half a century," Applied Economics, Taylor & Francis Journals, vol. 47(33), pages 3525-3539, July.
    8. Cover, James P. & Mallick, Sushanta K., 2012. "Identifying sources of macroeconomic and exchange rate fluctuations in the UK," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1627-1648.
    9. Guglielmo Maria Caporale & Luis A. Gil-Alana & Tommaso Trani, 2018. "On the Persistence of UK Inflation: A Long-Range Dependence Approach," CESifo Working Paper Series 6968, CESifo Group Munich.
    10. repec:aea:jecper:v:32:y:2018:i:1:p:195-210 is not listed on IDEAS

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    Keywords

    Inflation (Finance) - Great Britain ; Monetary policy - Great Britain;

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