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Macroeconomic Policy Rules in Theory and in Practice

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  • Christopher Allsopp

Abstract

This paper discusses the two-way interaction between policy and academic enquiry regarding rules for monetary policy. The emerging consensus on monetary policy is described; in that context, some of the features of the current UK system are outlined which seem particularly important. From a political-economy point of view, what really matters is that an appropriate policy framework should be instituted with the right general properties; a second set of questions, about improving or even optimising performance, can then be considered. Early worries that publicly-expressed disagreements, and public knowledge of closely-split votes, would work against the credibility of the UK system, now appear unfounded. The relevant meaning of ‘credibility’ of policy is a reputation for competence and trust in the system, and it is argued that the UK system has achieved this reputation. In addition, the monetary policy system in the UK is as transparent and accountable as any in the world. It is argued that the potential costs to credibility and transparency weigh heavily against giving the interest rate another role (e.g. responding to asset-price bubbles) beside pursuit of the inflation target. The paper concludes with some remarks on forecasting procedures in the face of structural change, and on the appropriate combination of monetary and fiscal policy.

Suggested Citation

  • Christopher Allsopp, 2002. "Macroeconomic Policy Rules in Theory and in Practice," Discussion Papers 10, Monetary Policy Committee Unit, Bank of England.
  • Handle: RePEc:mpc:wpaper:10
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    References listed on IDEAS

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    Cited by:

    1. Demertzis, Maria & Hughes Hallett, Andrew, 2007. "Central Bank transparency in theory and practice," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 760-789, December.
    2. Sapir, Andre & Aghion, Philippe & Bertola, Giuseppe & Hellwig, Martin & Pisani-Ferry, Jean & Rosati, Dariusz & Vinals, Jose & Wallace, Helen, 2004. "An Agenda for a Growing Europe: The Sapir Report," OUP Catalogue, Oxford University Press, number 9780199271498.
    3. Bennett T. McCallum & Edward Nelson, 2005. "Targeting versus instrument rules for monetary policy," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 225-245.
    4. David Cobham, 2006. "The Overvaluation of Sterling Since 1996: How the Policy makers Responded and Why," Economic Journal, Royal Economic Society, vol. 116(512), pages 185-207, June.
    5. Putzhammer, Heinz (ed.), 2006. "Wege zu nachhaltigem Wachstum, Beschäftigung und Stabilität: Dokumentation des Makroökonomischen Kongresses der Hans-Böckler-Stiftung in Kooperation mit dem Deutschen Gewerkschaftsbund vom 25.11.2004 ," Study / edition der Hans-Böckler-Stiftung, Hans-Böckler-Stiftung, Düsseldorf, volume 127, number 166.
    6. Fischer, Stanley, 2017. "The Independent Bank of England--20 Years On : a speech at "20 Years On," a conference sponsored by the Bank of England, London, England, September 28, 2017," Speech 973, Board of Governors of the Federal Reserve System (U.S.).
    7. O Bajo-Rubio & C Diaz-Roldan & V Esteve, 2010. "Testing the Fisher effect in the presence of structural change: A case study of the UK, 1966-2007," Economic Issues Journal Articles, Economic Issues, vol. 15(2), pages 1-16, September.
    8. Waltraud Schelkle, 2006. "The Theory and Practice of Economic Governance in EMU Revisited: What Have we Learnt About Commitment and Credibility?," Journal of Common Market Studies, Wiley Blackwell, vol. 44, pages 669-685, November.

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