Financial Stability and Monetary Policy
We argue that although UK monetary policy can be described using a Taylor rule in 1992-2007, this rule fails during the recent financial crisis. We interpret this as reflecting a change in policymakers' preferences to give priority to stabilising the financial system. Developing a model of optimal monetary policy with preference shifts, we show this provides a superior empirical model over crisis and pre-crisis periods. We find no response of interest rates to inflation during the financial crisis, possibly implying that the UK abandoned inflation targeting during the financial crisis.
|Date of creation:||Jan 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Via Patara, 3, 47921 Rimini (RN)|
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- Martin, Christopher & Costas Milas, 2002.
"Modelling Monetary Policy: Inflation Targeting in Practice,"
Royal Economic Society Annual Conference 2002
137, Royal Economic Society.
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- repec:esx:essedp:601 is not listed on IDEAS
- Christopher Martin & Costas Milas, 2008.
"The Sub-Prime Crisis and UK Monetary Policy,"
Working Paper Series
31_08, The Rimini Centre for Economic Analysis.
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15289, National Bureau of Economic Research, Inc.
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- Yuki Teranishi, 2009.
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IMES Discussion Paper Series
09-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
- François-Louis Michaud & Christian Upper, 2008. "What drives interbank rates? Evidence from the Libor panel," BIS Quarterly Review, Bank for International Settlements, March.
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