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Does Instrument Independence Matter under the Constrained Discretionof an Inflation Targeting Goal? Lessons from UK Taylor Rule Empirics

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  • Alexander Mihailov

    (University of Essex)

Abstract

We investigate whether increased independence affects central bank behavior when monetary policy is already in an inflation targeting regime. Taking advantage of the recent UK experience to identify such an exogenous change, we estimate Taylor rules via alternative methods, specifications and proxies. Our contribution is to detect two novel results: the Bank of England has responded to the output gap, not growth; and in a stronger way after receiving operational independence. Both findings are consistent with the Bank's mandate and New Keynesian monetary theory. Economic expansion and anchored inflation have thus complemented greater autonomy in influencing the Bank's policy feedback

Suggested Citation

  • Alexander Mihailov, 2007. "Does Instrument Independence Matter under the Constrained Discretionof an Inflation Targeting Goal? Lessons from UK Taylor Rule Empirics," Money Macro and Finance (MMF) Research Group Conference 2006 95, Money Macro and Finance Research Group.
    • Handle: RePEc:mmf:mmfc06:95
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    Cited by:

    1. 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.

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    More about this item

    Keywords

    asymmetry of monetary policy reaction function across the business cycle; response to output gap vs output growth; Taylor rules; operational independence; inflation targeting; United Kingdom;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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