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Financial Crises and Monetary Policy: Evidence from the UK

  • Christopher Martin

    ()

    (Department of Economics, University of Bath, UK)

  • Costas Milas

    ()

    (Economics Group, Keele Management School, UK; The Rimini Centre for Economic Analysis (RCEA), Italy; Erastinis, Greece)

We analyse UK monetary policy using monthly data for 1992-2010. We have two main findings. First, the Taylor rule breaks down after 2007 as the estimated response to inflation falls markedly and becomes insignificant. Second, policy is best described as a weighted average of a “financial crisis” regime in which policy rates respond strongly to financial stress and a “no-crisis” Taylor rule regime. Our analysis provides a clear explanation for the deep cuts in policy rates beginning in late 2008 and highlights the dilemma faced by policymakers in 2010-11.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 14_11.

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Date of creation: Feb 2011
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Handle: RePEc:rim:rimwps:14_11
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