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Uncertainty and UK Monetary Policy

  • Christopher Martin

    (Brunel University)

  • Costas Milas


    (Keele University, Department of Economics)

This paper provides empirical evidence on the response of monetary policymakers to uncertainty. Using data for the UK since the introduction of inflation targets in October 1992, we find that the impact of inflation on interest rates is lower when inflation is more uncertain and is larger when the output gap is more uncertain. These findings are consistent with the predictions of the theoretical literature. We also find that uncertainty has reduced the volatility but has not affected the average value of interest rates and argue that monetary policy would have been less passive in the absence of uncertainty.

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Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2005/11.

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Length: 25 pages
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:kee:kerpuk:2005/11
Contact details of provider: Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
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Order Information: Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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  1. Nelson, Edward, 2001. "UK Monetary Policy 1972-97: A Guide Using Taylor Rules," CEPR Discussion Papers 2931, C.E.P.R. Discussion Papers.
  2. DOLADO, J.J. & MARIA-DOLORES, R. & RUGE-MURCIA, Francisco J., 2003. "Nonlinear Monetary Policy Rules: Some New Evidence for the U.S," Cahiers de recherche 2003-24, Universite de Montreal, Departement de sciences economiques.
  3. Soderstrom, Ulf, 2002. " Monetary Policy with Uncertain Parameters," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(1), pages 125-45.
  4. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," SSE/EFI Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
  5. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September.
  6. Martin, Christopher & Costas Milas, 2002. "Modelling Monetary Policy: Inflation Targeting in Practice," Royal Economic Society Annual Conference 2002 137, Royal Economic Society.
  7. Swanson, Eric T., 2004. "Signal Extraction And Non-Certainty-Equivalence In Optimal Monetary Policy Rules," Macroeconomic Dynamics, Cambridge University Press, vol. 8(01), pages 27-50, February.
  8. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  9. Carl E. Walsh, 2003. "Implications of a changing economic structure for the strategy of monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 297-348.
  10. Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, 05.
  11. Orphanides, Athanasios & Wieland, Volker, 2000. "Inflation zone targeting," European Economic Review, Elsevier, vol. 44(7), pages 1351-1387, June.
  12. repec:cup:macdyn:v:8:y:2004:i:1:p:27-50 is not listed on IDEAS
  13. Glenn D. Rudebusch, 1999. "Is the Fed too timid? Monetary policy in an uncertain world," Working Papers in Applied Economic Theory 99-05, Federal Reserve Bank of San Francisco.
  14. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. Lin, Chien-Fu Jeff & Terasvirta, Timo, 1994. "Testing the constancy of regression parameters against continuous structural change," Journal of Econometrics, Elsevier, vol. 62(2), pages 211-228, June.
  16. Jansen, Eilev S & Terasvirta, Timo, 1996. "Testing Parameter Constancy and Super Exogeneity in Econometric Equations," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(4), pages 735-63, November.
  17. Gabriel Srour, 2003. "Some Notes on Monetary Policy Rules with Uncertainty," Working Papers 03-16, Bank of Canada.
  18. Castelnuovo, Efrem, 2003. "Taylor rules, omitted variables, and interest rate smoothing in the US," Economics Letters, Elsevier, vol. 81(1), pages 55-59, October.
  19. Ben Martin & Chris Salmon, 1999. "Should uncertain monetary policy-makers do less?," Bank of England working papers 99, Bank of England.
  20. Bennett T. McCallum, 1999. "Recent developments in the analysis of monetary policy rules," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 3-12.
  21. Malcolm D. Knight & Chair, 2003. "Implications of a changing economic structure for the strategy of monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 361-371.
  22. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  23. Peersman, Gert & Smets, Frank, 1999. "The Taylor Rule: A Useful Monetary Policy Benchmark for the Euro Area?," International Finance, Wiley Blackwell, vol. 2(1), pages 85-116, April.
  24. Pagan, Adrian & Ullah, Aman, 1988. "The Econometric Analysis of Models with Risk Terms," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(2), pages 87-105, April.
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